Basel III capital buffer requirements and credit union prudential regulation: a Canadian evidence

Author: 
Helyoth Hessou, Van Son Lai
Language: 
English
Year: 
2016

Abstract

Some Canadian provinces have already adopted Basel III rulesfor the oversight of their administrated
credit unions. This paper analyzes 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 average 5.8% of RWA and
behave countercyclically over the business cycle.This result suggests that,unlike commercial banks
worldwide, there is no need to require credit unions to hold the countercyclical bufferadvocated by
Basel III. However, there is evidence that low-capitalized credit unions capital buffers are procyclical.
These credit unions increased their Risk Weighted Assets (RWA) during booms but failed to build up
additional capital. Hence, low-capitalized credit unions may be required to hold the Basel III additional
conservation capital buffer.

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