Just 20 minutes ago, I was still dragging my feet around, trying to do anything but get my day under way.   But then an email came:

Dear Robin Cheung,

I am writing on behalf of an international publishing house, Lambert Academic Publishing.

In the course of a research on the Walden University, I came across a reference to your thesis on “The effects of Basel II and OSFI regulations that saved Canadian Banking: Key learnings for other banks and regulators.”.
We are an international publisher whose aim is to make academic research available to a wider audience.
LAP would be especially interested in publishing your dissertation in the form of a printed book.

Your reply including an e-mail address to which I can send an e-mail with further information in an attachment
will be greatly appreciated.

I am looking forward to hearing from you.
Kind regards,
Daniela M.
Acquisition Editor

LAP LAMBERT Academic Publishing AG & Co. KG
Saarbrücken
Dudweiler Landstraße 99, 66123 Saarbrücken Germany

When I came up the the topic idea–and I’m sure many other people also did–but I probably had a better grounding in the subject matter than the others who thought of it.  When I was a Financial Analyst at the Canadian Imperial Bank of Commerce, I had a chance to pursue a very entrepreneurial attitude, looking for interesting dotted line-reporting projects.  One of them  I completed was making a “mini-HRMS” system for the recruiters in CIBC HR that hired me.  It was in mid-2002 when the  Director of Investor Relations approached me to design a comparative analysis database and series of reports.  I was also allowed to research what performance and stability metrics were most appropriate, investigate who the owners of those data were, and populate the model.

I do so hope to hear back from her.  My dissertation topic can’t even be approved yet–until I finish more formal KAM research projects.  But it was still a great way to start my day.

Some of the important metrics were only known amongst analysts who specifically dealt with an international series of recommendations, named Basel II accord.  Among other things, Basel II recommended how much liquid funds the banks should have on hand, as a matter of stability

Regulatory capital categorizes bank assets according to how risky the assets are as well as how much control over are.  Tier 1 Capital is regarded conferring the most strength to a bank from a financial point of view.  It generally comprises the core capital (common stock) as well as any disclosed resserve that comprise part of the retained earnings.

Although the credit crisis had many more contributing factors than simply regulatory capital (for examplle, one striking difference between the Canadian and US banking system is how fragmented the US banking systems seems to be.  Canada had also traditionally limited Canadian finacial institutions from participating in  all the functions of a bank we take for granted the do today since regulators “knocked down” three of the four pillars  in 1986.  Previously, banks were not conduct business in all four pillars: banking, trust, brokerage, and insurance.

Structurally, Canadian banks seemed to find strength in their sheer size–with essetially ive providung service across all of Canada–a surface with greeater area than the US.  Meanwhile, another factor generally attributed to the US bank difficulties was the 1999 repeal of Glass-Steagall.  But we’ll discuss that on its own  another day.

Although Canada adopted both Basel I and Basel II, which stipulated 4% Tier 1 capital; the Office of the Superintendent of Financial Institutions decided, however, that Canadian abnks should provide 7%.   Even without applying any amount of statistics, we can see that in 2009, all of the Big Five banks kept their Tier 1 capital ratios (ratio of core equity to total assets).

In 2009, out of the Big Five banks, the lowest Tier 1 capital ratio was Bank of Nova Scotia, which still had 9.7%–still more than twice recommended Tier 1 capital ratio in Basel II.  The highest was CIBC at 11.5%

In fact, in 2009, the average Canadian bank maintained its Tier 1 Capital Ratio about 40% greater than  the OSFI regulations–and a startling 2.5 times the Basel II

Such excess reserves, given that Canadian Banks performed not only safely, but performed well.  Canadian banks were rated #1 in performance during the credit crisis–something that , avoiding the layoffs that were prevalent on Wall Street, seems to indicate that the reserve levels could be optimized.  In order to inform the decision of “how much is enough?:”we must take a step back and elucidate the underlying theory of bank capital structure and what factors most influence stability. Only when we understand the underlying theory can we make changes with  predictable nehaviour.