Basel III Capital Buffers and Canadian Credit Unions Lending: Impact of the Credit Cycle and the Business Cycle

37 Pages Posted: 13 Feb 2018

See all articles by Hélyoth Hessou

Hélyoth Hessou

Université de Sherbrooke; Université de Sherbrooke

Van Son Lai

Université Laval

Date Written: January 30, 2018

Abstract

We take advantage of the long-standing regulation of the risk-based capital and the leverage ratio in Canada to provide empirical evidence on the relation between the credit unions’ capital buffers and loans to members. Based on a unique sample of the 100 Canadian largest credit unions from 1996 to 2014, we find that both the risk-based capital buffer and the leverage buffer are positively related to changes in loans and loan growth. However, changes in these two types of buffers are negatively related to changes in the loans to assets ratios. This finding suggests that to adjust their capital buffers, Canadian credit unions curtail their loans and underscores the importance of the Basel III conservation and the countercyclical buffer requirements in fostering credit. Further, we show that the risk-based capital buffer is positively related to the credit cycle. However, a mechanical application of the rule based on the credit-to-gross domestic product (GDP) gap to activate the countercyclical buffer, would have misguided Canadian credit unions.

Suggested Citation

Hessou, Hélyoth and Hessou, Hélyoth and Lai, Van Son, Basel III Capital Buffers and Canadian Credit Unions Lending: Impact of the Credit Cycle and the Business Cycle (January 30, 2018). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3113754 or http://dx.doi.org/10.2139/ssrn.3113754

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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