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Basel II vs. Prompt Corrective Action: Which Is Best for Public Policy?

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  • George Kaufman

Abstract

This paper evaluates Basel II as a tool for achieving public policy objectives relative to structured early intervention and resolution (SEIR) and prompt corrective action (PCA) in the U.S. It concludes that Basel II compares poorly in terms of maintaining a safe and sound banking system. Rather, Basel II resembles a “best practices” guide for banks in managing their credit risk. However, it may do damage through encouraging some large banks in the U.S. to successfully pressure their regulators to lower the capital trigger ratio for “adequately‐capitalized” status in order to benefit from any lower regulatory capital requirement that Basel II may give them.

Suggested Citation

  • George Kaufman, 2005. "Basel II vs. Prompt Corrective Action: Which Is Best for Public Policy?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 14(5), pages 349-357, December.
    • Handle: RePEc:wly:finmar:v:14:y:2005:i:5:p:349-357
    DOI: 10.1111/j.0963-8008.2005.00111.x
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    References listed on IDEAS

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    1. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    2. Myron Kwast & S. Passmore, 1999. "The Subsidy Provided by the Federal Safety Net: Theory and Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 16(2), pages 125-145, December.
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