1 / 16

Why Were Canadian Banks More Resilient?

Why Were Canadian Banks More Resilient?. Lev Ratnovski and Rocco Huang IMF WP 09/152. Canada. Six nation-wide, universal banks Domestic, Carib /LA, US operations No failures, no public capital Banks able to raise capital early in the crisis. The paper. Policy-oriented study

mio
Download Presentation

Why Were Canadian Banks More Resilient?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Why Were Canadian Banks More Resilient? Lev Ratnovski and Rocco Huang IMF WP 09/152

  2. Canada • Six nation-wide, universal banks • Domestic, Carib/LA, US operations • No failures, no public capital • Banks able to raise capital early in the crisis

  3. The paper • Policy-oriented study • Large OECD banks (assets >100B) • Which key pre-crisis fundamentals… • Capital ratio, Balance sheet liquidity, Funding … best predict performance during the crisis? • Equity returns, Jan 2007 - Jan 2009 • Qualitative: public intervention, degree of stress • Canada • Bank fundamentals + Specific regulations • Wider implications for recent debates

  4. Capital Ratios Equity / Total assets Equity is balance sheet equity = Assets – Debt

  5. Balance Sheet Liquidity Liquid assets / Total assets Liquid assets = claims on government, other banks, parts of trading book

  6. Funding Structure Deposits / Total liabilities Deposits = retail, interbank, transaction accounts

  7. Regressions

  8. Summary • Capital • Important to have above critical minimum • Important in wholesale banks • Balance Sheet Liquidity • Important in explaining imminent failure • Depository Funding • Important in explaining failure • Canadian banks: outliers, ample retail deposits • Fundamentals matter

  9. Canadian Regulation • Above-Basel risk weighted capital targets • 7% tier 1 (instead of 4; banks hold 10-12%) • 10% tier 2 (instead of 8) • Quality of capital: 75% of tier 1 in common equity • Leverage ratio (“assets-to-capital multiple”) • 5%, based on tier 1+2 • IB and off-balance sheet consolidated • Direct effect (buffers) and incentive effect (focus on core business)  contained asset growth • Quality  transparency

  10. Canadian mortgage markets • Limits • 80% LTV • 32% mortgage service-to-income • 40% total debt service-to-income • Simplicity • 5 year max; Plain vanilla (e.g. no teaser rates) • Incentives to repay • Interest payments not income-deductible

  11. Summary • Capital • Important to have above critical minimum • Important in wholesale banks • Balance Sheet Liquidity • Important in explaining imminent failure • Depository Funding • Important in explaining failure • Canadian banks: outliers, ample retail deposits • Fundamentals, policies, incentives matter

More Related