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Fixing prompt corrective action

Author

Listed:
  • Kupiec, Paul

    (American Enterprise Institute, USA)

Abstract

Prompt corrective action (PCA) requires regulators to sanction banks before they become insolvent and to resolve institutions within 90 days of reaching critically undercapitalised 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 loss rate when banks failed compared to the pre-PCA period. A promising approach for reforming PCA is to replace capital adequacy ratios with a bank’s nonperforming asset coverage ratio. This simple revision will identify weak institutions long before they fail and could significantly reduce deposit insurance fund losses. The nonperforming asset coverage ratio is also a transparent and useful early warning statistic that depositors and bank-dependent businesses can use to monitor the financial strength of bank counterparties.

Suggested Citation

  • Kupiec, Paul, 2016. "Fixing prompt corrective action," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 9(3), pages 207-223, June.
    • Handle: RePEc:aza:rmfi00:y:2016:v:9:i:3:p:207-223
    as

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    References listed on IDEAS

    as
    1. 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.
    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. 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.
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    More about this item

    Keywords

    prompt corrective action; bank resolution; deposit insurance fund losses;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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