www.sciedu.ca/afr Accounting and Finance Research Vol. 3, No.

3; 2014

Are Canadian Banks Ready for Basel III?

Imad Kutum1 & Khaled Hussainey2
1
Kutum & Associates Inc, A1-5659 McAdam Road, Mississauga, ON, L4Z 1N9, Canada
2
Professor of Accounting, Plymouth Graduate School of Management & Plymouth, Business School (Faculty of
Business), Room 205, Cookworthy Building, Drake Circus, Plymouth, Devon, PL4 8AA, UK
Correspondence: Imad Kutum, Kutum & Associates Inc, A1-5659 McAdam Road, Mississauga, ON, L4Z 1N9,
Canada. Tel: 1-905-330-6826. E-mail: [email protected]

Received: August 4, 2014 Accepted: August 13, 2014 Online Published: August 15, 2014
doi:10.5430/afr.v3n3p159 URL: http://dx.doi.org/10.5430/afr.v3n3p159

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.
Keywords: Liquidity coverage ratio, Canadian banks, Basel III, Canada, Financial crisis
1. Introduction
The 2008 financial crisis has largely been blamed on the risks taken by banks related to their investments in the
mortgage and derivatives markets that resulted in a lack of liquidity (Jordan, Branch, McQuay, Cooper & Smith,
2013). Major financial institutions such as Bear Stearns, Northern Rock and AIG, which were major sources of loans
and funding for individuals and banks, not only lacked the liquidity to be able to make loans, but actually lacked the
funds needed to remain financially viable (Bessis, 2011). The resulting need for countries such as the United States
(US) and the United Kingdom (UK) to provide massive bailouts to banks caused the issue of bank liquidity to
become a major issue (Asongu, 2013). The Basel Committee on Banking Supervision implemented new guidelines,
known as Basel III, to increase bank liquidity as a way of reducing the threat for a future financial crisis such as the
one that occurred in 2008 (Gomes & Khan, 2011).
Much of the academic literature about bank liquidity and Basel III has been focused on financial institutions in the
US and the UK. Little attention has been given to the issue of bank liquidity for Canadian banks, or their ability to
meet liquidity coverage ratios under the Basel III guidelines. The purpose of this study is to analyze and test the
current Canadian bank liquidity coverage ratio in order to draw conclusions about the readiness of Canadian banks to
meet Basel III regulations. The motivation for carrying out this investigation is to better understand the liquidity
issues and readiness of Canadian banks to meet Basel III requirements by using data from Canadian banks
themselves, rather than making inferences from data collected from banks in the US or the UK. The importance of
this study is that the results of the data analysis performed can be used by researchers, practitioners, and government
officials to determine what further actions may be needed in Canada in order to ensure that Canadian bank liquidity
will meet the increasing liquidity coverage ratios mandated under Basel III requirements.

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The key findings of this study are that most of the larger Canadian banks are ready to meet Basel III liquidity
coverage ratio requirements. In fact, some of the large Canadian banks are almost to the point of being able to meet
the full 100% liquidity coverage ratio, which does not take effect until 2019. Unfortunately, there is one large
Canadian bank that shows potential signs of trouble when it comes to whether it will be able to meet the earlier 2015
liquidity coverage ratio requirement, as well as whether it will be able to meet the increases in liquidity coverage in
subsequent years.
This paper begins with an examination of the relevant literature to this study, including information about liquidity
ratios and Basel III requirements, bank liquidity in general, and the conceptual framework of the liquidity coverage
ratio. Next, an explanation of the methodology used to carry out this investigation is provided. Then, an explanation
of the results of the analysis performed on the data collected for this study is outlined, followed by the conclusions
drawn from the results of this study.
2. Literature review
2.1 Liquidity ratios and Basel III
The International Framework for Liquidity Risk Measurement, Standards and Monitoring, better known as Basel III,
was published in December 2010 as a means of addressing the concerns of bank liquidity that arose with the
financial crisis that began in 2008 (Gomes & Khan, 2011). One of the most important parts of the Basel III
requirements is the use of liquidity ratios to measure the assets that banks hold in relation to their liabilities (Ramona,
2013). Liquidity ratios provide a quantitative measure to creditors and investors about the ability of a business or
institution to cover its liabilities. In the case of banks, the use of liquidity ratios under Basel III is viewed as a means
of ensuring that those banks have enough high-quality assets to cover the risks that they take when loaning money to
individuals and investors (Gomes & Khan, 2011). Monitoring the level of assets to the level of liabilities taken on by
banks is meant to ensure that banks do not take on the high levels of risks they did during the early 2000s when they
engaged in the sale of large amounts of sub-prime mortgages and other high-risk derivative investments that led to
the financial crisis in 2008 (Vasile & Nitescu, 2012).
One of the problems that arose in the years leading up to the financial crisis is that banks invested heavily in
long-term liabilities, such as mortgages, without considering their abilities to meet short-term obligations. As banks
invest in long-term liabilities such as mortgage loans, a problem of short-term liquidity can arise. If a bank suddenly
finds that depositors withdraw large amounts of funds, they may not have the short-term liquidity to maintain
operations, because turning a long-term mortgage liability into short-term capital is often difficult (Hartlage, 2012).
The goal of Basel III requirements is to ensure that banks can withstand a 30-day financial shock by having enough
liquid assets that can be used to maintain operations during such an event (Gromova-Schneider & Niziolek, 2011). It
is believed that with the Basel III requirements, banks will have to be much more aware of the amount of long-term
liabilities they face, and will be forced to consider their own liquidity as a basis for making lending and investment
decisions (Bank for International Settlements, 2013).
2.2 Liquidity risk
In order to discuss the concept of liquidity risk, it is necessary to define what is meant by the term “liquidity”. It has
been noted that liquidity is a term that is often easier to identify than to actually define, because it can be defined
differently in different contexts (Clerc, 2008). For example, market liquidity is the trading of a particular amount of
assets or securities in a market without a significant impact on their price (Wu & Hong, 2012). Market liquidity
increases when the threat of receiving a reduced price for a volume of assets is present within a market because
investors sell the assets, which results in increased liquidity. However, instrument liquidity is the level of risk
associated with being able to trade financial instruments without a loss of value (Brunnermeier & Pedersen, 2009).
An example of instrument risk might be securitized mortgages and the threat of taking a loss on the sale of
securitized mortgages. In comparison, liquidity risk for banks is the ability of banks to raise funds to meet
obligations without incurring high costs or losses (Jasevičienė, Jasiene, Martinavicius, Jaseviciene, & Krivkiene,
2012; Ismal, 2010).
Liquidity risk is created as banks use short-term funds to make long-term investments, such as offering 30-year
mortgage loans to customers (Ratnovski, 2013). In fact, in recent years, loan commitments have been a major source
of liquidity risk for banks (Gatev, Schuermann, & Strahan, 2007). The argument has been made that bank liquidity
risk is actually associated with market and instrument risk because, as change occurs in market conditions, such as
price levels of homes, which brings the threat that securitized mortgages will sell for less, the result can be increased
liquidity risk for banks that have invested large amounts of their capital into mortgages (Acharya & Schaefer, 2006).

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Customer deposits into banks is one of the mechanisms by which liquidity risk is reduced, because as larger amounts
of money are placed into banks, there is a greater amount of short-term liquid assets available to cover the illiquid
securities that banks purchase and the illiquid investments that banks make, such as mortgage loans (Diamond &
Rajan, 2001).
The problem that banks have faced with regards to customer deposits in recent years and particularly before the
financial crisis is that the overall value of deposits has declined, in favor of investments in the stock and bond
markets. At the same time, banks turned away from focusing on their fiduciary roles with customers and focused on
generating revenues and profits from investments (Bergevin, Calmes & Theoret, 2013). The combination of reduced
liquid assets and the larger use of capital for illiquid investments has created the increased threat of liquidity risk for
banks.
The threat of banks having high levels of liquidity risk and not properly managing liquidity risk is the reason that
Basel III requirements have been released. The Basel III requirements create an international standard for bank
liquidity for the first time (Gomes & Khan, 2011). An international standard for determining acceptable bank
liquidity is considered to be important to achieve and maintain a global financial stability (Ramona, 2013). Liquidity
risk does not affect only those banks that are unable to properly manage their assets and liabilities; instead, liquidity
risk can impact banks that are able to manage their assets and liabilities. The financial crisis that began in 2008 came
to the attention of the public because of the bankruptcy of Lehman Brothers. As depositors learned about the collapse
of Lehman Brothers, they rushed to remove their money from that bank and many other banks, which created
liquidity problems across the entire banking sector (Hartlage, 2012).
2.3 Bank liquidity
While there is no recent research regarding bank liquidity in Canada, it is helpful to examine some of the recent
literature about changes in bank liquidity in other countries, as well as studies in which the impact of Basel III
requirements have been investigated. From these studies, it may be possible to hypothesize whether Canadian banks
may be able to meet Basel III liquidity coverage ratio requirements. A study was conducted regarding changes in
bank liquidity in the Bahamas and Caribbean nations from 2001 to 2012 (Jordan, Branch, McQuay, Cooper & Smith,
2013). While the study was not conducted in relation to Basel III requirements, it can provide some valuable
information about how bank liquidity in a particular part of the world has changed over the course of the past decade,
including the period in which the financial crisis occurred. The data showed that liquidity had increased in many
Caribbean nations. In the Bahamas, the authors of the study noted that increased liquidity was due to a decline in
demand for credit, as well as increased caution in issuing loans on the part of banks because of increased
delinquencies of outstanding loans.
One of the issues that has already been mentioned is the argument that market liquidity is associated with bank
liquidity (Acharya & Schaefer, 2006). Vogiazas and Alexiou (2013) investigated liquidity and the business cycle
among banks in Greece using data from 2004 to 2010. The researchers found that there was a significant relationship
between market conditions in the country and the liquidity of Greek banks. As market conditions worsened for the
country and on a global scale, bank liquidity was harmed, and bank liquidity also declined. The importance of this
research may be less about changes in liquidity in Greece and more about the way in which banks in that country
have been impacted by market conditions. The authors of the study argued that banks need strong basis of capital
during periods of macroeconomic growth, as well as during periods of macroeconomic decline. In this regard, the
larger argument would seem to be that it is necessary to put into place rules and controls in order to ensure that banks
control liquidity risk regardless of the conditions in the macroeconomy.
In a similar type of study, Sohaimi (2013) investigated liquidity risk and performance on the capital reserves of
banks in Malaysia. The researchers found that there was an association between performance and liquidity risk.
Specifically, the researchers found that non-performing loans were associated with periods of increased bank
liquidity. While these results may not seem that surprising, they do support the idea that larger market conditions do
have a relationship with bank liquidity. Further evidence for the idea of market conditions being associated with
bank liquidity risk is found in a study conducted by Rafea and Rad (2014), in which the liquidity risk of a single
bank branch in Iran was examined for the period of 2008 to 2012; the study revealed that bank liquidity risk changed
dramatically in 2008 and 2009, but not 2011 and 2012. The reason for the increase in liquidity risk in 2008 and 2009
seemed to be the bank’s focus on a specific source of deposits and banking products.
Finally, studies in which the impact of Basel III requirements has been investigated across Europe show differing
results due to differences in existing banking risk across European nations. For example, Nucu (2011) investigated
the potential impact of Basel III on Romanian banks, and concluded that the impact is likely to be limited. That

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limited impact is likely to be due to the way in which banks in Romania structure that funds that already results in
reduced liquidity risk. However, another study, which examined the liquidity of banks in Romania, showed that the
overall liquidity of Romanian banks declined to 0.81 in 2011 from 1.03 in 2007 (Maria, Andrei, Catalin & Anamaria,
2013). However, a liquidity level of 81% in 2011 following the financial crisis does indicate that Romanian banks do
indeed have a high level of liquidity even without the Basel III requirements.
Finally, Avadanei (2013) investigated bank liquidity in the Czech Republic, Poland, Romania and Croatia in relation
to Basel III requirements. The researcher found that banks in the Czech Republic and Croatia were best prepared to
handle shocks through low levels of liquidity risk, while banks in Romania had good levels of capital to handle
shocks. The researcher explained that while banks in Poland were also likely able to handle shocks, there were some
liquidity issues present.
Overall, the literature that has been reviewed regarding bank liquidity in different parts of the world seems to allow
for the conclusion that the financial crisis has actually made banks better able to handle the new Basel III
requirements because of the problems that have already occurred. It was the credit crisis that caused banks to have to
reduce the level of liabilities on their balance sheets. In this regard, the hypothesis that can be made is that banks in
Canada are likely to be ready to meet Basel III requirements because of their own actions, either voluntary or
involuntary, to reduce liquidity risk in the aftermath of the financial crisis.
3. Conceptual framework
The conceptual framework for this study, as well as for the Basel III rules to reduce liquidity risk, is the liquidity
coverage ratio. Under Basel III requirements, the liquidity coverage ratio of a bank is calculated by taking the value
of high-quality liquid assets and dividing by total net cash flows over the next 30 calendar days (Bech & Keister,
2012; van den End, 2012).

HQLA
LCR 
NCF
Where:
LCR = Liquidity Coverage Ratio
HQLA = High Quality liquid Assets
NCF = Net Cash Flow Over Next 30 Days
An important part of the concept of the liquidity ratio under Basel III is what is considered to be high-quality liquid
assets. The assets that are considered to be high quality and liquid are those which can easily and immediately
convert into cash with little or no change in their values (Bank for International Settlements, 2013).
The minimum liquidity ratio required under Basel III begins at 60% in 2015 and increases to 100% in 2019. Table 1
shows the minimum required liquidity coverage ratio for each year (Bank for International Settlements, 2013).
Table 1. Minimum required liquid coverage ratio
2015 2016 2017 2018 2019

Minimum LCR Requirement 60% 70% 80% 90% 100%

Source: Bank for International Settlements, 2013
The actual assets that are considered to be of a high quality and easily converted to cash with little or no change in
value are categorized as Level 1 and Level 2 assets. Level 1 assets are cash, central bank reserves, and sovereign debt
that qualifies for a weighted risk of 0% under the credit risk standards of Basel II. Level 2 assets are sovereign debts
that qualify for a weighted risk of 20% under Basel III, as well as corporate bonds and covered bonds that have a
minimum of an AA- credit rating. In order to determine the total value of high-quality liquid assets for the liquidity
risk, at least 60% of a bank’s assets that are considered to be high-quality liquid assets must be Level 1 assets, while
no more than 40% of the assets can be Level 2 assets (AFME, 2014).
4. Research methodology
In order to test the liquidity coverage ratios of Canadian banks using the Basel III methodology, information would
be needed regarding the amount of Level 1 and Level 2 assets held by the banks. Unfortunately, such information is
currently considered to be confidential, and will not be publicly available until after January 2015, which is the data

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of the requirement to comply with the Basel III liquidity coverage ratio requirement. In order to overcome the
inability to obtain the specific data that Canadian banks will have to use in order to show compliance with Basel III
requirements, the standard calculation of the quick ratio. The use of the quick ratio to determine the liquidity
coverage of the banks in this study is appropriate considering that the liquidity coverage ratio created under Basel III
actual builds upon the liquidity ratios that are traditionally used in business (Bank for International Settlements,
2013). Furthermore, the quick ratio is a measure that is widely used in business to measure a company’s short-term
liquidity. The formula for the quick ratio that is used as the substitute for the liquidity coverage ratio for this
investigation was carried out by using the liquid assets listed on the balance sheets of the Canadian banks included in
this study.

LA
LR 
LB
Where:
LR = Liquidity Ratio
LA = Liquid Assets Listed on Balance Sheet
LB = Liabilities Listed on Balance Sheet
While all liquid assets were used in the calculation, the liquidity coverage ratios that are reported in this study are
likely close to the actual liquidity coverage ratios that will be calculated using the Level 1 and Level 2 requirements
of Basel III. In addition, this method of determining the liquidity coverage ratios of Canadian banks is appropriate to
draw conclusions about the readiness of the banks to meet the actual Basel III regulations beginning in 2015 when
the initial requirement is a liquidity coverage ratio of only 60%.
4.1 Data
The data for this study was drawn from the balance sheets of six major Canadian banks. The Canadian banks that
were included in the study were Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial
Bank of Commerce (CIBC), National Bank, Royal Bank of Canada (RBC), and Toronto-Dominion Bank (TD).
These six banks are the largest banks in Canada, and are often referred to in Canada as “the Big Six”. Furthermore,
the country’s federal regulator designated these six banks in 2013 as being “too big to fail”, as they account for more
than 90% of the total banking assets in the country (The Canadian Press, 2013). The liquid assets and liabilities for
each of the banks were gathered for the period from 2009 to 2013. The reason for using this period was that 2009
was the first full year after the financial crisis began; using data from 2009 to 2013 allowed for the ability to examine
the trend in the changes in liquidity coverage for the banks in the aftermath of the financial crisis.
4.2 Data analysis
The analysis of the data consisted for calculating the liquidity ratios for the banks in this study for each of the years
from 2009 to 2013 in order to determine if they are in compliance with the Basel III requirements that take effect in
2015 based on the data from 2013. However, beyond simply examining the liquidity coverage ratios calculated for
the banks in this study using the data from 2013, the trends in changes in liquidity coverage ratios were also
examined. It is important to note that the examination of the data is focused on each individual bank, as opposed to
the six banks in this study as a group. Higher-level statistical tests could have been performed using the data from all
of the banks included in the study. The decision was made to avoid performing higher-level statistical tests on the
combined data from all of the banks. The reason for this is that under Basel III, each bank must individually meet the
liquidity coverage ratio requirements. While the banks in a particular country may have an overall level of meeting
the Basel III requirements that is high, any individual bank can be in non-compliance with the liquidity requirements.
Therefore, we examine Canadian banks individually.
5. Analysis and findings
Table 2 shows the liquid assets for each of the six banks individually, as well as the overall level of liquidity for all
of the banks from 2009 through 2013. The data show that from the period of 2009 through 2013, each of the six
banks raised the value of their liquid assets. For example, BMO increased the value of its liquid assets from about
$268 million in 2009 to about $488 million in 2013, while CIBC increased the value of its liquid assets from about
$193 million to about $229 million. Of all of the banks in the sample, CIBC seemed to have the lowest level of
increase in liquid assets.

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Table 2. Liquid assets of Canadian banks (in Canadian dollars)

Bank of Scotiabank Canadian National Royal Bank Toronto-Dominion

Montreal Imperial Bank of Canada Bank
Bank of
Commerce
2009 268,162,144 341,210,035 192,874,351 96,463,444 397,643,278 364,754,734
2010 285,474,347 353,016,357 204,329,914 107,458,389 445,785,633 414,752,116
2011 433,829,459 452,233,154 224,723,711 144,045,276 540,680,652 591,919,577
2012 463,371,160 506,368,511 215,472,792 159,452,300 573,907,001 631,724,867
2013 488,147,287 551,105,146 228,765,133 169,352,869 626,241,370 680,158,608
Source: Office of the Superintendent of Financial Institutions (2014)
Table 3 shows the percentage increase in the liquid assets of each of the six banks in the study from 2009 to 2013.
The table shows that CIBC did have the lowest increase in the value of liquid assets of the six banks with an increase
in liquid assets of just 18.6%. In comparison, BMO increased its liquid assets by 82% from 2009 to 2013, while TD
actually achieved an 86% increase in the value of its liquid assets during that period. Interestingly, CIBC was the
only bank of the six banks in this study that experienced an increase in liquid asset of less than 50% s from 2009 to
2013.
Table 3. Percentage increase in liquid assets from 2009 to 2013
Bank of Scotiabank Canadian National Royal Bank Toronto-Dominion
Montreal Imperial Bank of Canada Bank
Bank of
Commerce
82.03% 61.51% 18.61% 75.56% 57.49% 86.47%

Table 4 shows the liabilities of each of the six banks in this study from 2009 to 2013. The data show that all of the
banks in the study experienced increases in liabilities in the five years following the financial crisis. However, this is
not surprising given that the costs of operations likely increased as a result of normal increases in costs and inflation.
In addition, all of the banks in this study experienced increases in liquid assets, so the increases in liabilities does not
necessarily mean that the banks have a liquidity problem simply because liabilities increased during the same period.
Table 4. Liabilities of Canadian Banks (in Canadian Dollars)
Bank of Scotiabank Canadian National Royal Bank Toronto-Dominion
Montreal Imperial Bank of Canada Bank
Bank of
Commerce
2009 368,261,053 471,743,402 321,669,175 125,663,746 613,183,006 518,500,086
2010 389,760,092 499,025,518 336,250,377 138,093,597 687,255,874 577,242,274
2011 449,299,762 542,496,160 336,358,850 148,960,804 709,994,509 639,507,875
2012 495,359,453 626,665,243 376,347,855 169,662,425 779,071,789 762,405,897
2013 505,817,696 697,236,637 379,960,670 179,042,760 810,484,048 810,560,140
Source: Office of the Superintendent of Financial Institutions (2014)
Table 5 shows the percentage increase in the liabilities of the Canadian banks in this study from 2009 to 2013. CIBC
has the lowest percentage increase in liabilities of the six banks in the study from 2009 to 2013, at 18%. TD had the
largest overall percentage increase in liabilities from 2009 to 2013, at 56%. TD was the only bank in the sample that
had an overall increase in liabilities larger than 50% in the five years after the financial crisis

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Table 5. Percent change in liquid assets from 2009 to 2013

Bank of Scotiabank Canadian National Royal Bank Toronto-Dominion

Montreal Imperial Bank of Canada Bank
Bank of
Commerce
37.35% 47.80% 18.12% 42.48% 32.18% 56.33%

Figure 1 shows the overall percentage increases in liquid assets and liabilities for each of the six banks in the study.
Five of the six banks in the study experienced increases in liquid assets in the five years following the financial crisis
that were larger than the increases in liabilities that occurred. CIBC, however, had about the same level of increase
for both its liquid assets and its liabilities, which was about 18%. This could be problematic for CIBC as it suggests
that the bank may have had the same liquidity level in 2013 as it had in 2009. If CIBC’s liquidity level was low in
2009, then its liquidity level likely remained low in 2013.

Figure 1. Comparison of change in liquid assets and liabilities from 2009 to 2013
Table 6 shows the liquidity coverage ratios for each of the banks for each year from 2009 through 2013. The table
shows that each of the six banks in this study did increase their liquidity coverage ratios in the five years following
the financial crisis. Perhaps more importantly with regards to the implementation of Basel III requirements in 2015,
five of the six banks in the study had liquidity coverage ratios in 2013 that were well above the 60% liquidity
coverage ratio that will be required in 2015. BMO and National were prepared to meet the Basel III liquidity
coverage ratio requirement for 2018, as they had liquidity coverage ratios in 2013 of 96.51% and 94.59%,
respectively. TD was prepared to meet the 2018 liquidity coverage ratio requirement of 80% in 2013 with a liquidity
coverage ratio of 83.91%. Scotiabank and RBC were able to meet the 2016 Basel III liquidity coverage ratio
requirement of 70%, as they had liquidity coverage ratios in 2013 of 79.04% and 77.27%, respectively.

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Table 6. Liquidity coverage ratio of Canadian banks

Bank of Scotiabank Canadian National Royal Bank Toronto-Dominion
Montreal Imperial Bank of Canada Bank
Bank of
Commerce
2009 72.82% 72.33% 59.96% 76.76% 64.85% 70.35%
2010 73.24% 70.74% 60.77% 77.82% 64.86% 71.85%
2011 96.56% 83.36% 66.81% 96.70% 76.15% 92.56%
2012 93.54% 80.80% 57.25% 93.98% 73.67% 82.86%
2013 96.51% 79.04% 60.21% 94.59% 77.27% 83.91%
For the five banks that have been discussed thus far – BMO, Scotiabank, National Bank, RBC, and TD – it seems
appropriate to conclude that they are ready to meet the Basel III liquidity coverage ratio requirements that will take
effect in 2015. In 2013, each of these five banks had liquidity coverage ratios that would have allowed them to meet
at least the 2016 requirement of a 70% liquidity coverage ratio. Even more, BMO and National Bank were nearly
able to meet the full 2019 Basel III requirement of 100% liquidity coverage ratios, as those two banks had liquidity
coverage ratios in 2013 that were above 90%.
While the ability to meet specific liquidity coverage ratios in a single year is important, it is also necessary to
examine the trends in the liquidity coverage ratios of those five banks over the course of the five years following the
financial crisis. Each of the five banks did experience a slight decline in their liquidity coverage ratios from 2011 to
2012. However, BMO, National Bank, RBC, and TD did increase their liquidity coverage ratios from 2012 to 2013.
Scotiabank did not increase its liquidity coverage ratio from 2012 to 2013. Instead, Scotiabank’s liquidity coverage
ratio declined from 83.36% in 2011 to 80.80% in 2012, followed by a further decrease to 79.04% in 2013. While
Scotiabank was well ahead of the 2015 Basel III liquidity coverage ratio requirement in 2013, the bank’s leaders may
want to closely watch its liquid assets and liabilities in order to ensure that further declines that could harm its ability
to meet the 2016 liquidity coverage ratio requirement do not occur.
The one bank in the sample that has not yet been discussed in terms of its liquidity coverage ratio is CIBC. Of all six
banks, CIBC had the lowest liquidity coverage ratio from 2009 through 2013. More importantly with regards to the
Basel III requirements, CIBC had a liquidity coverage ratio in 2013 of 60.21%. In 2013, CIBC was barely able to
meet the 2015 liquidity coverage ratio requirement of 60%. The bank’s liquidity ratio did increase from 57.25% in
2012 to 60.21% in 2013, but the risk remains that even a very small decline in CIBC’s liquidity coverage ratio would
mean not being in compliance with Basel III requirements for 2015.
On a broader level, the other five banks in this study were able to meet the minimum Basel III requirements outlined
for 2015 in 2009. In fact, BMO, Scotiabank, National Bank, and TD could have met the 2016 Basel III liquidity
coverage ratio requirement of 70% in 2009. CIBC was not able to meet the 2015 liquidity coverage ratio requirement
in 2009, and was not in compliance with that requirement in 2012. In the five years following the financial crisis,
CIBC has moved from being in compliance to not being in compliance with 2015 requirements, and only barely met
those requirements in 2013.
Based on the data that have been analyzed, most of the large Canadian banks appear to be ready to meet the Basel III
requirements that begin in 2015. Even if the banks experience some decline in their liquidity coverage ratios, they
should be able to meet the 2015 requirements, as most are actually already able to meet the 2016 or 2017
requirements; the one exception to this, however, is CIBC, which is indeed a bank that deserves further attention and
some concern on the part of investors, customers, and financial regulators about its readiness to meet Basel III
liquidity coverage ratio requirements. The goal for both banks and regulators in Canada should be to ensure that
banks have some sort of buffer, in order to be able meet the 2015 Basel III requirements.
6. Discussion
The results of this study would seem to be positive in terms of the ability of most of the major Canadian banks to
meet Basel III liquidity coverage ratio requirements for 2015. However, it is useful to compare the readiness of the
major Canadian banks in this study with Basel III requirements with their US and European counterparts. The data
and studies regarding the ability of banks in Europe to fully comply with the liquidity coverage ratio requirements of
Basel III seem to be in conflict. For example, the authors (Sutorova & Teply, 2013) of the recent study regarding the
impact of Basel III liquidity requirements on banks in Europe argued that many banks in the European Union were

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already complying with Basel III liquidity requirements. Other researchers, however, have argued that large
European banks will likely have to reduce lending in order to reduce the liabilities on their balance sheets so that
they will be in full compliance with Basel III (Allen, Kei, Chan, Milne & Thomas, 2012). Furthermore, the European
Banking Authority was reported to have indicated that at the end of 2012, the largest banks in Europe were nearly
$100 billion Canadian Dollars short of being able to meet the capital requirements of Basel III (CBC News, 2013).
In terms of the ability of banks in the US to meet the liquidity requirements of Basel III, a recent report found that 20
of the 26 largest banks in the US were able or would be able to meet those requirements (Weinberger, 2014).
However, the report also stated that six of the largest banks in the US, namely State Street Corp., the Bank of New
York Mellon Corp, Comerica, Inc., U.S. Bancorp, Northern Trust Corp., and M&T Bank, were not prepared to meet
the liquidity requirements of Basel III as of the first quarter of 2014.
In comparison to banks in Europe and the US, it would seem that the largest banks in Canada are as prepared or even
better prepared to meet Basel III requirements. The largest banks in the United States and Canada seem to generally
have the same level of readiness to meet Basel III. Unfortunately, Europe seems to be particularly problematic in
terms of banks meeting Basel III liquidity requirements because of the vast differences in lending practices and the
amount of capital held by banks in different countries across the continent (Howarth & Quaglia, 2013). Unlike the
US or Canada, the vastly different economic conditions and structures of the many countries that comprise the
European Union may mean that overall, European banks are indeed less prepared to meet Basel III requirements.
7. Conclusion
The purpose of this study has been to analyze and test the current Canadian bank liquidity coverage ratio in order to
draw conclusions about the readiness of Canadian banks to meet Basel III regulations. From a broad perspective, the
data that has been analyzed allows for the conclusion that most large Canadian banks are ready to meet the Basel III
liquidity coverage ratio requirements. However, the results of the data analysis conducted in this study showed that
not all large Canadian banks are on solid enough ground to be able to meet the Basel III liquidity coverage ratio
requirements. Specifically, CIBC had a liquidity coverage ratio of 60% in 2013, but that was actually an
improvement from 2012, when the bank had a liquidity coverage ratio of 57.25%. The bank’s data show that CIBC
may not be able to meet and maintain compliance with the 2015 requirement of a liquidity coverage ratio of 60%,
and certainly has the risk of not meeting the 2017 Basel III requirement of a 70% liquidity coverage ratio.
While the overall data indicate that most large Canadian banks are indeed ready to meet the Basel III requirements
that take effect in 2015, regulators in Canada should avoid being blindsided by the broad data and examine the data
from each bank in the country. Basel III requirements are implemented for each bank, not for an entire nation. This
means that while most Canadian banks may be well prepared for demonstrating compliance with Basel III, some
banks may not be ready to demonstrate compliance. It would be easy for financial regulators in Canada to be happy
with the overall findings of this study, to the point of ignoring the fact that one of the country’s major banks, CIBC,
may not be able to comply with Basel III requirements.
Another issue that must be considered for banks that are only slightly prepared to meet the 2015 Basel III liquidity
requirements is that liquidity coverage ratio requirements increase by 10% each year until 2019. For banks that are
only slightly prepared to meet the 2015 requirements, the question must be raised as to whether they can realistically
increase their liquidity coverage ratios by 10% in a single year. Unfortunately, some type of government intervention
might be necessary to ensure that banks that are already struggling will be able to achieve full compliance with Basel
III in 2015, and can achieve compliance with the increasing liquidity requirements that will occur until 2019.
The primary limitation of this study is the way in which the liquidity coverage ratios of the banks that were
investigated were calculated. The argument could be made that the results of this study may not accurately reflect the
actual liquidity coverage ratios of the banks that have been examined, as it was not possible to determine the actual
liquid assets that would qualify under Basel III requirements. While this might affect the specific liquidity coverage
ratios of the banks that were examined, it seems unlikely that this would cause a bank that was deemed to have a
high liquidity coverage ratio to actually show an inability to comply with Basel III in 2015. The one exception to this
might be CIBC. Once CIBC’s actual liquid assets that qualify as highly liquid and of a high-quality under Basel III
are examined, the bank may demonstrate further problems achieving and maintaining Basel III compliance. In this
regard, rather than focusing on the finding that CIBC can comply with the 2015 Basel III liquidity requirement,
regulators need to focus on the decisions of CIBC and all banks as to how they plan to achieve and maintain Basel III
compliance on a permanent basis.

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Considering that Basel III requirements will be implemented in the very near future, the recommendation for future
research is to investigate the characteristics and conditions of those banks that are found to not be in compliance with
Basel III liquidity coverage ratio requirements once they take affect in 2015. Once the requirements take full effect,
the role for researchers will need to be one of helping to identify why certain banks are not meeting requirements,
and what is needed for those banks to come into compliance with Basel III. Even in a country such as Canada, the
potential for one of the big six banks to not be in compliance with Basel III presents an important opportunity to
examine why the bank was not ready before compliance was required, and to highlight the internal actions that may
have resulted in a lack of compliance if such an event were to occur.
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