Berenger Piper is a Financial Economist by training, holding a Bachelor’s degree in Economics, an MBA, and a Master’s degree in Advanced Studies and Research in Finance (ASRF). Berenger Piper has over 14 years of experience in Financial Risk Management. He is currently an Associate Director with one of the Top 3 Canadian Investment Banks in Capital Market Risk and Control.
He will be defending his Doctorate of Business Administration (DBA)’s thesis in September 2023, on a Financial Economics’ research topic titled: «The Impact of Changes in Regulatory Capital Requirements on the Lending Behaviour of Canadian Banks », supervised by Professor Laurent Weill, Full Professor of Economics, EM Strasbourg Business School, University of Strasbourg.
Thesis Direction
Pr Laurent Weill
Thesis Title
The Impact of Changes in Regulatory Capital Requirements on the Lending Behaviour of Canadian Banks
Abstract
The world economy has depended on the financial sector’s roles of transactions settlements and intermediation that enable exchanges between market participants. The financial sector’s roles of transactions settlements and intermediation are facilitated by the availably of liquidity for lending to economic agents such corporations and households. The financial crisis of 2007 revealed the limitations of the financial sector’s framework in place before the crisis. Regulators and policy makers enhanced various microprudential regulations such as regulatory capital requirement to ensure economic resilience and financial stability.
Our research studied the impact of one of these microprudential regulations on the behaviour of financial institutions. Specifically, our research studied the impact of changes in regulatory capital requirements on the lending behaviour of Canadian banks.
Our study used a sample of annual financial statistics of Canadian financial institutions from 2012 to 2021, from Fitch Connect database, encompassing Universal Commercial Banks, Wholesale Commercial Banks, Development Banks, as well as Trading and Investment Banks, representing 120 Canadian banks, and accounting for more than 90% of the Canadian banking sector, in terms of aggregate total assets over the period of 2012 to 2021. Our data also encompasses macroeconomic statistics from the Bank of Canada, Bank for International Settlements (BIS), and Economic Policy Uncertainty Research Group. Our research applied econometric methodologies.
Firstly, we investigated the impact of changes in regulatory capital requirements on the volume of gross loans offered by Canadian banks to the non-financial sector. The results found that increases in Canadian regulatory bank capital requirement ratio led to a decrease in the volume of gross loan offered by Canadian banks to the non-financial sector, over the current year, considering macroeconomic control variables.
Secondly, we studied the impact of changes in regulatory capital requirements on the interest rates charged on gross loans offered by Canadian banks to the non-financial sector. The results found that increases in regulatory capital requirements did not impact loan interest rates during normal economic times, characterised with economic growth and expansion. The findings aligned with the results of Brei and Moreno (2019) who found that increases in regulatory capital requirements only led to increases in loan interest rates during times of large capital inflows, and not during normal economic times.
Thirdly, we investigated the effect of changes in regulatory capital requirements on the components of the portfolio of gross loan offered by Canadian banks to the non-financial sector. Our studies covered the three largest components of the portfolio of gross loan offered by Canadian banks to the non-financial sector: Corporate & Commercial Loans (26% of Gross Loans), Residential Mortgage Loans (44% of Gross Loans), and Other Consumer/Retail Loans (20% of Gross Loans). Our results suggested that changes in Canadian regulatory bank capital requirement ratio had a direct downward impact on only the portion of Canadian lending portfolio that accounts for Corporate & Commercial Loans. The results also found that the impact of the increase in the Canadian regulatory bank capital requirements on Corporate & Commercial Loans is dependent on changes in economic policy.
Additionally, we found that in times of economic policy uncertainty, Canadian banks with an increased return on assets over the previous year decreased their credit allocation towards Residential Mortgage Loans, following an increase in Canadian regulatory bank capital requirements. However, the level of credit portfolio allocation by Canadian banks to other Consumer/ Retail Loans is rather impacted by the macroeconomic environment.
Overall, our results contribute to the existing and scarce literature on regulatory capital requirements. They provide Canadian regulators and policy makers with guidelines and conditions necessary for the increase of the level of regulatory bank capital requirements, without negatively impacting the level of liquidity required to enable economic recovery from periods of economic uncertainty and downturns.