March 2023 update - Banking drama

Over the last several days, an unfolding banking crisis displaced inflation at the top of financial headlines. Silvergate Capital, a lender to the crypto industry, voluntarily shut down operations on March 8th. Then on March 10th, Silicon Valley Bank, a bank that finances tech startups, was shut down by regulators, becoming the 2nd largest bank failure in U.S. history. Two days later, Signature Bank, which was also a major lender in the crypto space, was also closed by regulators and became the 3rd largest bank failure in U.S. history. Last weekend, Credit Suisse had to be bought out by its Swiss rival UBS. Once a giant institution that escaped the 2008 crisis with no problems, it wasted that with several years of scandals and legal troubles. That’s 4 banks in a little over a week and a half, with a 5th, First Republic Bank, waiting to be rescued.

Where that leaves depositors and investors is complicated. The majority of clients’ chequing and savings accounts, as well as GICs, are protected by CDIC insurance in Canada and FDIC insurance in the U.S.. Canadian banks are more tightly regulated than their U.S. counterparts and are very diversified across several types of businesses, so they are far less likely to fail. Large American banks are mostly well diversified as well, with some possible exceptions, but the smaller regional banks are more likely to be not well diversified. The U.S. banks that failed so far were concentrated in riskier businesses. Credit Suisse shared with them a very un-Swiss like appetite for risk that led to its downfall. For now, the banking crisis seems mostly contained but it is hard to tell if it is truly finished. High interest rates will force banks to reduce the risks they take, for fear of facing the same fate as those that already failed, which could slow the economy. While larger institutions should come out unscathed, the full impact of this drama will likely not be felt for a while.

Sample portfolio for a Canadian investor

Asset class	ETF ticker	Weight
Canadian stocks	VCN	2.25%
US stocks	VUN	11.25%
Foreign stocks	VIU	9.00%
US corporate bonds	ZSU	0.00%
Canadian corporate bonds	XSH	0.00%
Global high yield bonds	MHYB	0.00%
Emerging markets bonds	ZEF	0.00%
Global real estate	TGRE	2.50%
Canadian mortgage-backed bonds	ZMBS	30.00%
Canadian government bonds	CLF	15.00%
Global government bonds	XGGB	15.00%
Gold	KILO	15.00%

Sample portfolio for a US investor

Asset class	ETF ticker	Weight
US stocks	SCHX	11.25%
Non-US stocks	SCHF	11.25%
US corporate bonds	SPIB	0.00%
Non-US corporate bonds	PICB	0.00%
US high yield bonds	SPHY	0.00%
Non-US high yield bonds	IHY	0.00%
Emerging markets bonds	VWOB	0.00%
Global real estate	REET	2.50%
US mortgage-backed bonds	MBB	30.00%
US government bonds	VGSH	15.00%
Non-US government bonds	BWZ	15.00%
Gold	GLDM	15.00%