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Fixing prompt corrective action

Author

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  • Paul H. Kupiec

    (American Enterprise Institute)

Abstract

Prompt Corrective Action (PCA) requires regulators to sanction banks before they become insolvent and to resolve institutions within 90 days of reaching critically undercapitalized status. Forensic studies of the financial crisis conclude that the PCA process not only failed to rehabilitate troubled banks, it also produced a higher average failed-bank loss rate compared to the pre-PCA period. The most promising approach for PCA reform is to replace PCA capital ratios with a bank’s nonperforming-asset coverage ratio. Research has demonstrated that this simple revision identifies failing institutions before current PCA measures which could significantly reduce Deposit Insurance Fund losses.

Suggested Citation

  • Paul H. Kupiec, 2016. "Fixing prompt corrective action," AEI Economics Working Papers 872682, American Enterprise Institute.
    • Handle: RePEc:aei:rpaper:872682
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    References listed on IDEAS

    as
    1. Armen Hovakimian & Edward J. Kane, 2000. "Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994," Journal of Finance, American Finance Association, vol. 55(1), pages 451-468, February.
    2. Joe Peek & Eric 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.
    3. 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.
    4. 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.
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