Banks are in turmoil. Here's how Canadians might be affected

All eyes are on theglobal banking sector after suddenturmoil brought down or threatened a handful of U.S. banks and one major European bank this month.

The collapse of Silicon Valley Bank (SVB), followed by the near death of two other regionalinstitutions First Republic and Signature Bank left market-watchers jittery and fearful of a domino effect like the one that led to the global financial crisis of 2008.

And that was before Credit Suisse one of the biggest banks in the world, safely housed in Switzerland, of all places came crashing down last week.What do these financial tremors mean for Canadians?

What happened? And why?

Silicon Valley Bank, First Republic Bank, Signature Bank and Credit Suisse all faced differentproblems made worse by rising interest rates.

But thecommon thread was lackof confidence,saidPedro Antunes, chief economist at the Conference Board of Canada.

Banking is built on confidence. Ifdepositors lose faith,panic and rushto withdraw their assets from a bank for fear of its failure, itcan lead to a bank run, as with SVB.

Sometimes,the panic spreads often, Antunes told CBC News, by social media. Regulators around the world are now trying to contain the spread to prevent the collapse of additional banks.

WATCH | Central banks try to halt crisis:

Global central banks band together to prevent crisis

1 year ago

Duration 2:19

Global central banks have banded together to reassure world markets and prevent the spread of the banking crisis that started with the collapse of two regional U.S. banks earlier this month from spreading.

Have we seen this before?

Lawmakers such as U.S. Treasury Secretary Janet Yellen have pushed back on the idea thatthese incidents echo the onset of the global financial crisis of the late 2000s.SVB's failure was the largest collapse of a U.S. banking institution since Washington Mutual among many others went underin 2008.

Shortly after longtime rival UBS agreed to buy Credit Suisse, central banks around the world including the Bank of Canada said they would interveneby offeringcashand other support to banks, again in hope of halting the spread of failure and stabilizingthe market.

Similar measures were takenin 2008. But this is not a repeat of that crisis, saidKarl Schamotta, chief market strategist at Toronto global payment company Corpay.

"Things are far more regulated today," Schamotta said, though there are concerns about a slowdown in economic growth.

"The issues that caused the 2008 crisis massive derivatives use, lots and lots of exposure to the U.S. housing market those are not present this time around."

How does this affect Canada?

Canadians don't have much to worry about, according to Schamotta, because our banking system is "far more secure, far more diversified and far more regulated," than those of the U.S. or Europe.

"So this is an issue that is probably most important from a psychological perspective, less important in terms of your bank deposits," he said.

The 2008 crisis was a global disaster, "but most of Canada's banks did quite well through that. In fact, they came out quite strong," Antunes said.

"I think that's still very much the story. We have a different banking system" that's less competitive and easier to backstop than in the U.S.

But as concern grows about a possible hit to the global economy, business investors "will be more prudent," Antunessaid. And such investments are important for driving economic activity and Canadian trade.

Likewise, we could see a "tightening" of lending standards around the world, saidStephen Brown, deputy chief North America economist at the research firm Capital Economics.

WATCH | What does the SVB collapse mean for Canada?:

What does the Silicon Valley Bank collapse mean for Canada?

1 year ago

Duration 6:04

Karl Schamotta, chief market strategist for Corpay, says the collapse of Silicon Valley Bank could mean a 'turbulent' time for Canadian investors.

Banksmight not be willing to lend as much money or invest in equity bonds, according to Brown. That could change investing patterns, which in turn could impact the growth of global and U.S. GDP and the Canadian economy by extension.

"Weaker GDP growth in the U.S. in general doesn't bode well for Canadian exports," Brown said.

"So these are all reasons to think that the Bank of Canada in particular probably isn't going to be forced back to resuming interest rate [hikes] and probably will be cutting rates again before the end of the year."

Will this lead to a recession?

A recession was predicted in Canadafor 2023, and recent events could lead to a slightly deeperdip in economic activity, Antunessaid. However, any potential recessionwill differ from past slumps because the current slowdown is coming with few job losses, as employment continues to trendupward.

"This recession is going to be very, very different for most households in Canada, because we're in a situation where the labour market is very much a big shock absorber," he said.

SchamottasaidCanada and the world might enter a recession in the months ahead, as the effect of interest rate hikes "hits the bottom line forhouseholds and for businesses around the world."

"Retail sales, employment, factors like that will tell us about the health of the Canadian economy, about whether Canadian households are cutting their spending and reducing how much they put into the economy," he added.

"All of those things are going to contribute to whether we have a recession."

LISTEN | Is a recession looming?:

Front Burner26:46Will the banking crisis trigger a recession?