Basel III Capital Buffer Requirements and Credit Union Prudential Regulation: Canadian Evidence

50 Pages Posted: 30 Jul 2016 Last revised: 4 May 2017

See all articles by Hélyoth Hessou

Hélyoth Hessou

Université de Sherbrooke; Université de Sherbrooke

Van Son Lai

Université Laval

Date Written: April 21, 2017

Abstract

Some Canadian provinces have already adopted Basel III rules for the oversight of their administrated credit unions. We analyze the importance of the Basel III additional capital buffer requirements for credit union prudential regulation. Based on a sample of the 100 largest credit unions in Canada from 1996 to 2014, we find that Canadian credit union capital buffers behave countercyclically over the business cycle. Further, credit unions hold a capital buffer bigger than the maximum buffer advocated under Basel III which is 5% of risk-weighted assets (RWA). These results suggest that, unlike commercial banks worldwide, credit unions, by and large, are already in compliance with the new Basel III buffer requirements. However, there is evidence that the capital buffers of low-capitalized credit unions are procyclical. These credit unions increased their RWA during booms but failed to build up additional capital accordingly. Hence, weakly capitalized credit unions are more likely to adjust their capital buffers if they are subject to Basel III capital buffer regulation.

Keywords: Capital regulation, Credit union capital, Business cycle fluctuations, Countercyclical capital buffer, Conservative capital buffer, Basel III

JEL Classification: G21, G29, G32

Suggested Citation

Hessou, Hélyoth and Hessou, Hélyoth and Lai, Van Son, Basel III Capital Buffer Requirements and Credit Union Prudential Regulation: Canadian Evidence (April 21, 2017). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2815731 or http://dx.doi.org/10.2139/ssrn.2815731

Hélyoth Hessou

Université de Sherbrooke ( email )

Sherbrooke, Québec J1K 2R1
Canada
J1K 2R1 (Fax)

Université de Sherbrooke ( email )

2500, boulevard de l'Université, Ecole
de gestion, Campus principal (Pav K1)
Sherbrooke, Québec J1K 2R1
Canada
J1K 2R1 (Fax)

Van Son Lai (Contact Author)

Université Laval ( email )

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

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