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Will Legislated Early Intervention Prevent the Next Banking Crisis?

Author

Listed:
  • Joe Peek

    (Boston College)

  • Eric S. Rosengren

    (Federal Reserve Bank of Boston)

Abstract
A key provision of the Federal Deposit Insurance Corporation Improvement Act of 1991 was prompt corrective action (PCA). PCA emphasized early intervention by bank supervisors and was intended to limit forbearance by making supervisory intervention more timely and less discretionary. However, PCA, as implemented, appears to have been oversold. Had PCA been in place during the recent banking crisis in New England, it would have had little, if any, effect. Since it imposes an essentially nonbinding constraint on bank supervisors, PCA is not likely to play a major role in preventing the next banking crisis.

Suggested Citation

  • Joe Peek & Eric S. Rosengren, 1996. "Will Legislated Early Intervention Prevent the Next Banking Crisis?," Boston College Working Papers in Economics 359, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:359
    as

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    File URL: http://fmwww.bc.edu/EC-P/wp359.pdf
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    References listed on IDEAS

    as
    1. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
    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. Joe Peek & Eric Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
    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.
    5. R. Alton Gilbert, 1991. "Supervision of undercapitalized banks: is there a case for change?," Review, Federal Reserve Bank of St. Louis, issue May, pages 16-30.
    6. David S. Jones & Kathleen Kuester King, 1992. "The implementation of prompt corrective action," Proceedings 349, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Richard Dale & Franco Bruni & Christian de Boissieu, 2000. "Strengthening Financial Infrastructure - Deposit Insurance and Lending of Last Resort," SUERF Studies, SUERF - The European Money and Finance Forum, number 7 edited by Morten Balling, May.
    2. George J. Benston & George G. Kaufman, 1997. "FDICIA after five years: a review and evaluation," Working Paper Series, Issues in Financial Regulation WP-97-01, Federal Reserve Bank of Chicago.
    3. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2006. "Can feedback from the jumbo CD market improve bank surveillance?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 92(Spr), pages 135-175.
    4. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Did FDICIA enhance market discipline on community banks? a look at evidence from the jumbo-CD market," Supervisory Policy Analysis Working Papers 2002-04, Federal Reserve Bank of St. Louis.
    5. Joe Peek & Eric Rosengren, 1997. "Derivatives Activity at Troubled Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 287-302, October.
    6. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
    7. George J. Benston & George G. Kaufman, 1998. "Deposit insurance reform in the FDIC Improvement Act: the experience to date," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 22(Q II), pages 2-20.
    8. David G. Mayes, 2011. "Early Intervention and Prompt Corrective Action in Europe," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 10, Edward Elgar Publishing.
    9. David G. Mayes, 2008. "Avoiding the Next Crisis," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(4), pages 44-50, December.
    10. Richard W. Kopcke, 2000. "Deposit insurance, capital requirements, and financial stability," Working Papers 00-3, Federal Reserve Bank of Boston.
    11. Rosalind L. Bennett & Mark D. Vaughan & Timothy J. Yeager, 2005. "Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund," Working Paper 05-05, Federal Reserve Bank of Richmond.
    12. David G. Mayes, 2009. "Banking Crisis Resolution Policy - Lessons from Recent Experience - which elements are needed for robust and efficient crisis resolution?," CESifo Working Paper Series 2823, CESifo.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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