How do credit unions adjust their capital ratios? Evidence from Brazil

Purpose The purpose of this paper is to analyze the speed at which credit unions adjust their capital ratios. Design/methodology/approach The systemic Generalized Method of Moments (GMM-Sys) was applied to 704 Brazilian individual credit unions from 2014 to 2022, with a total of 5,864 observations. Findings The results indicate that the median Basel Ratio was higher than the Leverage Ratio, without breaching the regulatory minimum. Credit unions show differences in the speed of adjustment, with faster adjustment for the Basel Ratio compared to the Leverage Ratio. Size influences the speed of adjustment, with larger credit unions being more flexible in adjusting their Leverage Ratio more quickly, while smaller credit unions adjust more slowly to the Basel Ratio. During economic crises, the speed of adjustment of the Basel Ratio was higher, probably due to more thorough analysis by supervisors and stakeholder expectations. Originality/value The originality of this study lies in the analysis of the speed of adjustment of capital ratios in credit unions, focusing on the differences between the Basel and Leverage Ratios. This study fills a significant gap in the literature, offering insights into how these institutions adjust their capital ratios in the context of Basel III. The research also explores the impact of credit union size and economic crises on these adjustments, contributing to a deeper understanding of the financial behavior of these institutions and its implications for regulators and supervisors.