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Banks’ capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes

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  • Guidara, Alaa
  • Lai, Van Son
  • Soumaré, Issouf
  • Tchana, Fulbert Tchana

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 behavior 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.

Suggested Citation

  • Guidara, Alaa & Lai, Van Son & Soumaré, Issouf & Tchana, Fulbert Tchana, 2013. "Banks’ capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3373-3387.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3373-3387
    DOI: 10.1016/j.jbankfin.2013.05.012
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    1. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    2. Baselga-Pascual, Laura & Trujillo-Ponce, Antonio & Cardone-Riportella, Clara, 2015. "Factors influencing bank risk in Europe: Evidence from the financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 138-166.
    3. repec:eee:advacc:v:36:y:2017:i:c:p:58-74 is not listed on IDEAS
    4. Robert McKeown, 2017. "How vulnerable is the Canadian banking system to fire-sales?," Working Papers 1381, Queen's University, Department of Economics.
    5. repec:eee:ecmode:v:67:y:2017:i:c:p:392-408 is not listed on IDEAS
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    7. Yang Li & Yi-Kai Chen & Feng Sheng Chien & Wen Chih Lee & Yi Ching Hsu, 2016. "Study of optimal capital adequacy ratios," Journal of Productivity Analysis, Springer, vol. 45(3), pages 261-274, June.
    8. repec:eee:jbfina:v:82:y:2017:i:c:p:203-216 is not listed on IDEAS
    9. Robert McKeown, 2017. "Where are the economies of scale in Canadian banking?," Working Papers 1380, Queen's University, Department of Economics.
    10. repec:eee:finsta:v:30:y:2017:i:c:p:92-110 is not listed on IDEAS
    11. Li, Shaofang & Marinč, Matej, 2016. "Competition in the clearing and settlement industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 134-162.
    12. Saadaoui Zied, 2015. "The Cyclical Behaviour of Bank Capital Buffers: An Empirical Evidence for MENA Banking Systems," Review of Middle East Economics and Finance, De Gruyter, vol. 11(2), pages 145-182, August.
    13. Memmel, Christoph & Gündüz, Yalin & Raupach, Peter, 2015. "The common drivers of default risk," Journal of Financial Stability, Elsevier, vol. 16(C), pages 232-247.
    14. repec:spt:apfiba:v::y:2018:i::f:8_2_3 is not listed on IDEAS
    15. repec:eee:riibaf:v:44:y:2018:i:c:p:488-503 is not listed on IDEAS
    16. Hogan, Thomas L., 2015. "Capital and risk in commercial banking: A comparison of capital and risk-based capital ratios," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 32-45.
    17. Hans Degryse & Sanja Jakovljević & Steven Ongena, 2015. "A Review of Empirical Research on the Design and Impact of Regulation in the Banking Sector," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 423-443, December.
    18. repec:wsi:ijfexx:v:04:y:2017:i:02n03:n:s242478631750027x is not listed on IDEAS
    19. Chernykh, Lucy & Cole, Rebel A., 2015. "How should we measure bank capital adequacy for triggering Prompt Corrective Action? A (simple) proposal," Journal of Financial Stability, Elsevier, vol. 20(C), pages 131-143.

    More about this item

    Keywords

    Capital buffer; Risk; Performance; Basel accords; Regulation; Business cycles; Canadian banks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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