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

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

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

10. Regressions

11. Dependent Variable:Extreme StressPrice Decline >85% (1)(2)(3)(4)(5)(6) Equity Ratio-0.1820.259-3.042***1.2403.580**-31.80*** (0.454)(0.187)(3.419)(2.025)(1.221)(10.02) Equity Ratio<4%0.08020.361** (0.0988)(0.183) Balance Sheet Liquidity-0.541***-0.425***-0.382***-1.527***-1.694***-1.187** (0.431)(0.377)(0.336)(0.576)(0.631)(0.538) Depository Funding-0.326***-0.281**-0.479***-1.133**0.536-3.836*** (0.224)(0.204)(0.447)(0.401)(0.629)(1.029) Depository Funding<50%-0.01480.473** (0.0224)(0.228) Equity Ratio * Depository Funding 5.208***58.15*** (5.480)(17.33) Log (Asset)0.0629***0.0517***0.0529***0.142 0.168 (0.0574)(0.0526)(0.0516)(0.0938)(0.106)(0.105) N72 62 R-squared0.3930.4350.4500.1390.2400.233

12. Dependent Variable:Price decline>70%Price decline (%) (7)(8)(9)(10)(11)(12) Equity Ratio-0.9073.685-51.03***11.88190.6**-1448*** (3.692)(3.053)(18.96)(122.8)(85.48)(366.1) Equity Ratio<4%0.558***22.20*** (0.125)(4.511) Balance Sheet Liquidity-0.890-1.151-0.402-33.20-25.77-17.73 (0.611)(0.835)(0.601)(24.64)(21.94)(22.43) Depository Funding-1.156**1.776***-5.543***-51.68***17.66-167.9*** (0.492)(0.600)(2.152)(17.59)(17.91)(36.38) Depository Funding<50%0.576***13.07** (0.116)(4.775) Equity Ratio * Depository Funding 87.43***2545*** (33.46)(597.0) Log (Asset)0.1230.09370.1354.0252.3534.988* (0.0916)(0.124)(0.0953)(2.664)(2.707)(2.785) N62 R-squared0.0840.2820.1700.1470.3230.269

13. 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

14. 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

15. 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

16. 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