May 01 2017

Canadian Credit Unions: Capital Buffers Under Basel III


Hessou and Lai report on a timely analysis of how Canadian credit unions’ capital buffers respond during periods of economic flux. Credit union leaders worldwide will find this analysis instrumental in developing strategies for economic survival, as well as for advocating for sound regulation for credit unions.

Helyoth Hessou
Department of Finance, Insurance, Real Estate
Laval University
Van Son Lai
Laboratory for Financial Engineering
Laval University, IPAG Business School
Report Number 423

Executive Summary

In the aftermath of the financial crisis, regulators around the world revised their rules to address what was widely perceived to be one of the major causes of the crisis, namely the tendency for banks to behave procyclically by taking on more and higher-risk lending in economic upturns and doing the opposite in recessions.

The resulting rules, known as the Basel III reforms, have created, among other things, an expectation that banks will lean against the economic cycle by building capital through what are called conservation and countercyclical capital buffers, the latter being simply an additional conservation buffer. These buffers would dampen lending in an upturn, helping avoid excessive speculation and precarious positions, while supporting lending in a downturn to help reboot the economy. To date, the rules have not been uniformly applied to credit unions.