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Factors Driving the Prompt Corrective Action of Supervisory Authorities: Evidence from Korea’s Savings Banks

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  • Wook Sohn
  • Eun Sup Sim

Abstract

Korea’s savings banks that expanded their number of high-risk loans experienced defaults after the 2008 global financial crisis. We consider the prompt corrective action (PCA) to analyze factors that drive savings banks to failure given that an order for PCA by a supervisory authority normally leads to default. We conduct discrete choice models to estimate the probability of PCA using 2005–11 data on 103 Korea savings banks. We find that the postexamination actions taken by supervisory authorities and a rapid increase in loans increase the possibility of PCA. These results suggest that depositors and the market can reduce the costs incurred from defaults by identifying information that predicts PCA.

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  • Wook Sohn & Eun Sup Sim, 2014. "Factors Driving the Prompt Corrective Action of Supervisory Authorities: Evidence from Korea’s Savings Banks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(6), pages 90-101, November.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:6:p:90-101
    DOI: 10.1080/1540496X.2014.1013876
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    Cited by:

    1. Lawrence J. White, 2015. "When Time is Not on Our Side: The Costs of Regulatory Forbearance in the Closure of Insolvent Banks," Working Papers 15-05, New York University, Leonard N. Stern School of Business, Department of Economics.

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