بافر سرمایه بانکها، ریسک و عملکرد در سیستم بانکی کانادا: تاثیر چرخه های کسب و کار و تغییرات نظارتی

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.

The 2007 subprime turmoil underscores the imperative for a sound micro- and macro-prudential framework for banking regulation and supervision to build up resilience against severe crises and to ensure the stability of the entire financial system.1 During this crisis, Canada’s banking system performed much better than other industrialized countries. Even as high-profile banks in Europe, the United States and elsewhere collapsed, were bailed out, or underwent imposed take-overs—Fortis, Citigroup, UBS and the Royal Bank of Scotland are a few examples—not one Canadian bank failed or was openly bailed out. In this paper, we examine the relationship between bank capital buffers and business cycles in Canada’s banking sector. We first examine the cyclicality of Canadian banks’ capital buffer with respect to business cycles, where the buffer (excess capital) is the size of the capital cushion that exceeds the regulatory capital requirement of the Office of the Superintendent of Financial Institutions (OSFI). Cyclicality of bank capital is defined as the co-movement between business cycles and bank capital. Positive co-movement implies counter-cyclicality and negative co-movement denotes procyclicality.2 Therefore, to have counter-cyclicality between bank capital buffers and the business cycle, capital has to be accumulated in booms and lower in troughs.3 Second, we analyze the impact of capital buffers on banks’ risk and performance, controlling for business cycles as well as for capital regulatory environments, namely in the period preceding the Basel Accords, during Basel I, and during amendments to the Basel I and Basel II regimes. Our research questions are as follows: (1) Do Canadian banks’ capital buffers run counter to business cycles? (2) Are Canadian banks’ capital buffers sensitive to changes in capital regulations? (3) How sensitive are Canadian banks’ risk to changes in their capital buffer? (4) How do induced changes in bank capital buffers affect the performance of Canadian banks? Our work departs from the literature on capital buffers in several ways. First, it uses an extensive database of quarterly data over a relatively long period (1982–2010) to study Canada’s banking sector. Second, unlike some previous research, our study period covers at least three regulatory environments. Third, we study the relationship between capital buffers, risk and performance simultaneously, developing a system of three simultaneous equations that link capital buffer, risk and performance within several business cycles and multiple regulatory changes. To our knowledge, this is the first paper to comprehensively address these issues relating to capital buffers in the Canadian context. We find that Canadian banks are well-capitalized, exceed the minimum requirements for both the regulatory capital buffer (5.09%) and the leverage capital buffer (0.49%). These findings provide one possible explanation for how Canadian banks weathered the recent financial crisis better than banks in other countries.4 We also document positive co-movement between Canadian banks’ capital buffer and business cycles (countercyclical effects): more capital is being accumulated during booms. In exploring the role played by the Basel regulations in this relationship, we find that this positive co-movement is still present after the 1996 amendment to the Basel I Accord adopted in 1998, although it is more pronounced over the 1988–1997 Basel I period. This may be one explanation for the resilience of the Canadian banking sector to the recent financial crisis. To contrast, most studies on European banking institutions (e.g., Jokipii and Milne, 2008, Jokipii and Milne, 2011 and Stolz and Wedow, 2011) and on US banks (e.g., Shim (2013)) find a negative co-movement between business cycles and banks’ capital buffer. Since the negative co-movement between capital buffer and business cycles can exacerbate the procyclical impact of Basel regulation, these studies underline the need for capital provisioning during good economic times. We also find a negative but not statistically significant relationship between variations in banks’ capital buffer and banks’ risk exposure. This finding is similar to that of Lindquist (2004), who found support for the hypothesis that capital buffers may be considered as insurance against failure to meet capital requirements. Our results support the view that Basel and the leverage constraints imposed by Canadian regulators, principally the Office of the Superintendent of Financial Institutions (OSFI), have to some extent succeeded at better aligning Canadian banks’ risk-taking with their capital base. Finally, we find that the impact of capital buffer on the performance of Canadian banks depends on how performance is measured. When equity returns are used to measure performance, there is no effect. However, if returns on assets (ROA) or Tobin’s Q are used as performance measures, capital buffers have a significant and positive impact on ROA and a negative impact on Tobin’s Q. We can then draw two main policy implications from the Canadian experience. First, rigorous and disciplined implementation of both risk-based and non-risk-based capital requirements may help mitigate the well-documented procyclicality associated with current Basel risk-based capital charges. Secondly, capital requirements should be higher during booming economic periods because this is when banks can accumulate more capital. Conversely, a reduction in capital requirements during recessionary periods would be welcome since this may provide more room for banks to operate. The rest of this paper is structured as follows. In Section 2, we discuss our empirical framework. In Section 3, we describe the data and present the descriptive statistics. In Section 4, we discuss and interpret the empirical results. In Section 5, we carry out robustness checks. We conclude in Section 6.

This paper examines the cyclical behavior of Canadian banks’ capital buffers (the difference between the banks’ capital levels and minimum capital requirements) and analyzes its impact on the banks’ risk and performance throughout business cycles and in response to Canadian regulatory changes during various Basel regimes. Our work departs from the literature on capital buffers in several respects. First, it stands out among studies of the Canadian banking sector in its use of a comprehensive dataset over a relatively long time frame (1982–2010). This sample period allows us to account for at least three business cycles and three major regulatory regimes: (1) the period before the Office of the Superintendent of Financial Institutions (OSFI) adopted Basel I guidelines, from 1982 to 1987; (2) 1988 to 1997, when OSFI adopted and enforced the Basel I Accord; and (3) 1998 to 2010, after OSFI adopted the 1996 amendment to the Basel I Accord, which introduced market risk as a distinct risk category, and the Basel II period. Second, our study is original in studying the cyclical behavior of bank capital buffers with respect to business cycles and regulatory changes—a question of paramount importance in the aftermath of the subprime credit crisis—on the resilient Canadian banking sector. Third, we study bank capital buffer, risk and performance simultaneously using a two-step generalized method of moments (2SGMM) framework. Comprehensively addressing the relationship between capital buffers, business cycles, risk, performance and regulatory changes in the Canadian context constitutes an important contribution to the literature. We address the following research questions: (1) Do Canadian banks’ capital buffers run counter to business cycles? (2) Are Canadian banks’ capital buffers sensitive to changes in capital regulation? (3) How sensitive are Canadian banks risk to changes in their capital buffer? (4) How do induced changes in the capital buffer affect the performance of Canadian banks? We find that Canadian banks are well capitalized, which helps explain why they weathered the recent financial crisis so well. We document that bank capital buffers exhibit a positive co-movement with business cycles. This result holds even when we control for changes in regulatory regimes. We also find no strong evidence that variations of banks’ capital buffer impact banks’ exposure to risks and return on equity. By and large, there is no strong relationship between capital buffers and risk. Hence, the motive to hold an excess capital buffer may be driven by market discipline. We can then draw two main policy implications on the basis of Canadian experience. First, rigorous and strict implementation of both risk-based and non-risk-based capital requirements can help mitigate the well-documented procyclicality associated with current Basel risk-based capital charges. Second, increases in capital requirements should occur during periods of strong economic growth because it is during these periods that banks can accumulate more capital; conversely, during recessionary times, a reduction in capital requirements would be desirable since it may provide more flexibility for banks to weather downturns.