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Will legislated early intervention prevent the next banking crisis?

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  • Joe Peek
  • Eric S. Rosengren

Abstract

A key provision of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was prompt corrective action (PCA). PCA emphasized early intervention by bank supervisors and was intended to limit forbearance by making supervisory intervention more timely and less discretionary. However, PCA legislation appears to have been oversold. Had PCA been in place during the recent banking crisis in New England, it would have had little, if any, effect. Relative to actions taken by supervisors, PCA provisions would not have imposed more severe restrictions on banks, intervened earlier, or intervened in problem banks that would otherwise have been missed.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 96-5.

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Date of creation: 1996
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Publication status: Published in Southern Economic Journal (July 1997): 268-80.
Handle: RePEc:fip:fedbwp:96-5

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Keywords: Banks and banking ; Federal Deposit Insurance Corporation Improvement Act of 1991 ; Financial crises - Asia;

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References

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  1. David S. Jones & Kathleen Kuester King, 1992. "The implementation of prompt corrective action," Proceedings 349, Federal Reserve Bank of Chicago.
  2. Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June.
  3. R. Alton Gilbert, 1991. "Supervision of undercapitalized banks: is there a case for change?," Review, Federal Reserve Bank of St. Louis, issue May, pages 16-30.
  4. Joe Peek & Eric S. Rosengren, 1996. "The use of capital ratios to trigger intervention in problem banks: too little, too late," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-58.
  5. Joe Peek & Eric Rosengren, 1993. "Bank regulation and the credit crunch," Working Papers 93-2, Federal Reserve Bank of Boston.
  6. Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
  7. R. Alton Gilbert, 1991. "Supervision of undercapitalized banks: is there a case for change?," Proceedings 324, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. David G. Mayes, 2009. "Banking Crisis Resolution Policy - Lessons from Recent Experience - which elements are needed for robust and efficient crisis resolution?," CESifo Working Paper Series 2823, CESifo Group Munich.
  2. Richard W. Kopcke, 2000. "Deposit insurance, capital requirements, and financial stability," Working Papers 00-3, Federal Reserve Bank of Boston.
  3. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2003. "Can feedback from the jumbo-CD market improve bank surveillance?," Working Papers 2003-041, Federal Reserve Bank of St. Louis.
  4. Richard Dale & Franco Bruni & Christian de Boissieu, 2000. "Strengthening Financial Infrastructure - Deposit Insurance and Lending of Last Resort," SUERF Studies, SUERF - The European Money and Finance Forum, number 7 edited by Morten Balling.
  5. Joe Peek & Eric S. Rosengren, 1996. "Derivatives Activity at Troubled Banks," Center for Financial Institutions Working Papers 96-52, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
  7. George J. Benston & George G. Kaufman, 1998. "Deposit insurance reform in the FDIC Improvement Act: the experience to date," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 2-20.
  8. Mayes, David G, 2009. "Early intervention and prompt corrective action in Europe," Research Discussion Papers 17/2009, Bank of Finland.
  9. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market," Supervisory Policy Analysis Working Papers 2002-04, Federal Reserve Bank of St. Louis.
  10. Rosalind L. Bennett & Mark D. Vaughan & Timothy J. Yeager, 2005. "Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund," Working Paper 05-05, Federal Reserve Bank of Richmond.
  11. David G. Mayes, 2008. "Avoiding the Next Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 9(4), pages 44-50, December.
  12. George J. Benston & George G. Kaufman, 1997. "FDICIA after five years: a review and evaluation," Working Paper Series, Issues in Financial Regulation WP-97-01, Federal Reserve Bank of Chicago.

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