Prompt Corrective Action can assist prudential regulation
The Bank for International Settlements (BIS) has published a working paper to determine if Prompt Corrective Action (PCA) on the part of regulators is the best method to use against banks with inadequate levels of book-value capital. The report, ‘Dynamic prudential regulation: is Prompt Corrective Action optimal?’, found that PCA can benefit both regulators and banks.
Many countries introduced PCA as a way to swiftly close problem banks that had lower capital levels than was acceptable after specific banking crises. A notable example of this is the Federal Deposit Insurance Cooperation Improvement Act (FDICIA) in the US, which introduced PSA in the US in 1991 after over 1,000 banks failed and the banks’ deposit insurance fund was close to insolvency.
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