Inflation and bank collapses and a global financial crisis - oh my!

The snow is melting, the birds are chirping, and we have a whole new level of financial uncertainty to contend with. In the last few weeks, we have seen the relative calm of a rate pause, a bond market rollercoaster, and some of the most tumultuous unrest of the global banking system we have seen since 2008.

But what does that all actually mean for us; for the everyday Canadian homeowner just trying to get by? Today we’re going to peek behind the curtain of all of the economic jargon, show you how it translates to your mortgage and (believe it or not) show you some silver linings.

What happened to Silicon Valley Bank?

Before getting into the meat and potatoes of the global financial crisis, we have to break down what happened earlier this month when Silicon Valley Bank collapsed, sending shockwaves through the international financial community.

Essentially, Silicon Valley Bank fell victim to what is called a "bank run" or, in other words, a bunch of depositors withdrawing their money simultaneously. Just as most banks typically operate, SVB used depositor funds to buy up billions of dollars in bonds. Generally, these investments are secure, but as a majority of these investments were made at lower rates, their value decreased dramatically in today’s increasing rate environment. In most cases when the value of institutional investments decreases there is minimal fallout, as they are typically held for long enough periods to see values come back up. This time, however, venture capital (especially in SVB’s client niche of tech startups) has been drying up in the post-pandemic era of inflation and financial unrest. So, when clients could no longer access new funding to continue their business development, they started to come back to retrieve their cash to stay afloat. But as more withdrawals were requested and less and less cash became available, the bank was forced to sell its assets at a loss to cover the costs. Thus began the snowball effect of the bank run which led bank regulators to seize the remaining assets of the bank on March 10th.

A bank is only as strong as the consumer’s confidence in it - so people will only put their money there if they feel confident that it will be safe. So when depositors (rightly) lost confidence in SVB (as well as others including Credit Suisse, Signature Bank and First Republic), it kicked off a consumer panic on a global scale, seeing people rush to their respective institutions to pull their cash out before further damages occur.

But it’s important to point out that while our economic framework does run parallel to the US in many ways, there are a few key differences - not the least of which is the security of our banking system. In the United States, there are as many as 8000 smaller institutions, many of which have very specific niches (ie SVB’s investments in the tech startup sector) and all of which are unburdened by much regulation. In Canada, on the other hand, we mostly rely on The Big 6 - a smaller selection of large, diverse and intensely regulated institutions. Thanks to strong risk management practices, tight oversight and far less competition, the likelihood of a similar story playing out this side of the border is very unlikely.

Balancing inflation with stability

Of course, all the news of turmoil in the banking system adds a new layer of urgency to the conversation about inflation. Up until the collapse of Silicon Valley Bank, all signs were pointing to the US Federal Reserve increasing its key rate by as much as 50 basis points in an effort to aggressively tackle inflation. With the Bank of Canada’s overnight rate on pause after its own March meeting, questions were arising around whether we would see another hike as soon as April in response to the moves south of the border. Even though February’s inflation numbers showed that the 8 consecutive rate hikes of the past year are beginning to have a positive impact on inflation in Canada, the BoC made clear that it was ready to continue its aggressive campaign to get inflation back to the 2% target and to watch the US moves with a keen eye.

But that was all the calm before the collapse. After the fall of SVB and Signature Bank (and near misses of others), the Fed announced a smaller 25 basis point increase to its own key rate - a sign that it intends both to take inflation seriously while also moving gently to avoid a potential financial crisis. In response, the Bank of Canada has been tasked with gauging the weight of its own agenda - to continue to hold the overnight rate at 4.5% and see how inflation unfolds in March and April, or to potentially decrease sooner than expected in an effort to curb potential damage in the wake of the banking shake-up. We’ll know for certain when the next rate update is announced on April 12th.

What will this mean for your mortgage?

I know it’s hard to consider any silver lining when we are faced with an onslaught of bad financial news. But there actually are a few.

The first is that despite the way these headlines bring the 2008 worst-case scenario to mind, this situation is very different from that one. Not only are the factors leading up to these recent collapses entirely different than those of the 2008 recession (a blog post for another day), but today’s economic framework is much stronger. Add to that the much smaller and more specific scale of 2023’s banking unrest along with the speed of governing body intervention and almost every expert will tell you, this won’t be 2008 all over again.

Second, the SVB collapse could be the catalyst we’ve been waiting for to see rates start to mortgage rates decrease. In the weeks since the main event, as investors have rushed back to the safe haven of government bonds, bond yields have dropped significantly and taken fixed mortgage rates with them. Some lenders have already decreased fixed rates by as much as 0.60%, and if the volatility in the market persists then we may see even more decreases as we head into spring.

Finally, if the upward pressure continues on bond prices and inflation continues to trend gradually downward, the Bank of Canada may have no choice by to course correct and begin decreasing its overnight rate sooner than anticipated - some expect the first decrease could be as soon as this summer.

Although the forces behind them are fraught, these decreased rates could not come at a better time for potential homebuyers and current homeowners alike. For current fixed-term mortgage holders facing a renewal this year, a dip in rates now could mean the chance to circumvent some potential payment shock. For potential buyers, it could mean the perfect opportunity to lock in a lower fixed rate with a rate hold of up to 120 days to ensure that if rates come back up in the coming weeks, today’s low rate is still available.

Of course, with such uncertainty on the global financial scale, we can’t make any rash predictions of what’s to come and can really only take it day by day. But today we can say for certain that Canada remains relatively insulated from a potential banking crisis, that inflation is heading in the right direction, and that the mortgage rate decreases in the wake of March’s events could be a great tool for some Canadians to leverage.

If you’ve got questions about anything happening out in the financial world right now, or how you can take advantage of today’s rate environment before things change again, schedule a no-obligation call below! Our team is here to help guide you through it all, for better or worse, and we’re so happy that this next month could bring just a little bit of sunshine for some of you!