Banks’ Capital Buffers, Risk and Performance in the Canadian Banking System: Impact of Business Cycles and Regulatory Changes

44 Pages Posted: 1 Oct 2011 Last revised: 15 May 2015

See all articles by Alaa Guidara

Alaa Guidara

Université Laval

Van Son Lai

Université Laval

Issouf Soumaré

Laval University

Fulbert Tchana Tchana

Ministry of Finance, Quebec

Date Written: January 31, 2013

Abstract

Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap imposed by Canadian banking regulations did not change this cyclical behaviour of Canadian bank capital. We find Canadian banks to be well-capitalized and that they hold a larger capital buffer in expansion than in recession, which may explain how they weathered the recent subprime financial crisis so well. This evidence that Canadian banks ride the business and regulatory periods underscores the appropriateness of a both micro- and a macro-prudential “through-the-cycle” approach to capital adequacy as advocated in the proposed Basel III framework to strengthen the resilience of the banking sector.

Keywords: Capital Buffer, Risk, Performance, Basel Accords, Regulation, Business Cycles, Canadian Banks

JEL Classification: G21, G28

Suggested Citation

Guidara, Alaa and Lai, Van Son and Soumaré, Issouf and Tchana, Fulbert Tchana, Banks’ Capital Buffers, Risk and Performance in the Canadian Banking System: Impact of Business Cycles and Regulatory Changes (January 31, 2013). Journal of Banking and Finance, Vol. 37, No. 9, 2013, Available at SSRN: https://ssrn.com/abstract=1934446 or http://dx.doi.org/10.2139/ssrn.1934446

Alaa Guidara

Université Laval ( email )

Faculty of Business Administration
2325, Terrasse Street
Quebec, Quebec G1V 0A6
Canada

Van Son Lai (Contact Author)

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Issouf Soumaré

Laval University ( email )

Faculty of Business Administration
Department of Finance, Insurance and Real Estate
Quebec, Quebec G1V 0A6
Canada
1418 656 3423 (Phone)
1418 656 2624 (Fax)

Fulbert Tchana Tchana

Ministry of Finance, Quebec ( email )

12 Saint-Louis
QUEBEC, Quebec G1R5L3
Canada

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