Are Canadian Banks Ready for Basel III?

Abstract

The purpose of this study is to analyze and test the current liquidity coverage ratio of Canadian banks’, and draw conclusions about the readiness of Canadian banks to meet Basel III regulations.

Liquidity coverage ratios for six major Canadian banks were calculated using the liquid assets and liabilities listed on their balance sheets from 2009 to 2013. The actual assets that meet Basel III requirements could not be acquired, as this is private information that does not have to be released until 2015.

Five of the six major Canadian banks that were examined are likely to be able to meet Basel III requirements in 2015. While some of the banks are already on their way to achieving full 2019 compliance, one of the banks is only barely meeting the 2015 requirements, raising the question of whether it will be able to meet and maintain Basel III liquidity requirements.

The limitation of this study is that the liquidity coverage ratio formula used in Basel III could not be calculated, as the specific assets that meet Basel III requirements could not be obtained for the Canadian banks. The implication is that Canadian regulators need to focus attention on those banks that have been shown to be potentially unable to meet Basel III liquidity requirements.

The value of this study is based in part on the lack of similar studies conducted on Canadian banks. This is one of the few studies of this nature not conducted on banks in the United States or the United Kingdom.