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The use of capital ratios to trigger intervention in problem banks: too little, too late


  • Joe Peek
  • Eric S. Rosengren


A wave of depository institution failures and dramatic losses to deposit insurance funds occurred in the 1980s and continued into the 1990s. In response, the Congress passed a series of bank regulatory acts intended to address the problems that led to the crisis and prevent its recurrence. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was the capstone of this transformation of banking legislation, with two key provisions designed to reduce the cost of troubled banks to the deposit insurance fund: early closure of failing institutions, and early supervisory intervention in problem banks, referred to as prompt corrective action.> This article considers whether the capital ratio thresholds that trigger prompt corrective action intervention provide sufficient lead time for successful intervention at troubled banks. The study finds that because prompt corrective action is based on a lagging indicator of a bank's financial health, it is likely to trigger intervention in problem banks only after they have been identified by examiners, who rely on far more information that the capital ratio. The authors propose two simple measures to improve the current triggers for prompt corrective action.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedbne:y:1996:i:sep:p:49-58

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. 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.
    2. Joe Peek & Eric S. Rosengren, 1996. "Will Legislated Early Intervention Prevent the Next Banking Crisis?," Boston College Working Papers in Economics 359, Boston College Department of Economics.
    3. Rahul Dhumale, 2000. "An Incentive Based Regulatory System: A Bridge Too Far," Working Papers wp170, Centre for Business Research, University of Cambridge.
    4. Andrew Kuritzkes & Til Schuermann & Scott Weiner, 2002. "Deposit Insurance and Risk Management of the U.S. Banking System: How Much? How Safe? Who Pays?," Center for Financial Institutions Working Papers 02-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Chernykh, Lucy & Cole, Rebel A., 2015. "How should we measure bank capital adequacy for triggering Prompt Corrective Action? A (simple) proposal," Journal of Financial Stability, Elsevier, vol. 20(C), pages 131-143.
    6. Clovis Rugemintwari & Alain Sauviat & Amine Tarazi, 2012. "Bâle 3 et la réhabilitation du ratio de levier des banques. Pourquoi et comment ?," Revue économique, Presses de Sciences-Po, vol. 63(4), pages 809-820.
    7. Jonathan Njoku, 2012. "Surveillance model of going concern in banking," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 40-76.
    8. Raj Aggarwal & Kevin T. Jacques, 1998. "Assessing the impact of prompt corrective action on bank capital and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 23-32.
    9. Loveland, Robert, 2016. "How prompt was regulatory corrective action during the financial crisis?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 16-36.
    10. Claessens, Stijn & Klingebiel, Daniela, 1999. "Alternative frameworks for providing financial services," Policy Research Working Paper Series 2189, The World Bank.
    11. repec:eee:mulfin:v:41:y:2017:i:c:p:80-91 is not listed on IDEAS


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