Assessing the Impact of Prompt Corrective Action on Bank Capital and Risk
10 Pages Posted: 29 Oct 2007
Date Written: October 1998
This paper examines the impact that the Prompt Corrective Action (PCA) standards had on bank portfolios following the passage of FDICIA in 1991. To do this, the simultaneous equations model developed by Shrieves and Dahl (1992), and later modified by Jacques and Nigro (1997) to study the impact of risk-based capital, is used to examine how PCA simultaneously influenced bank capital ratios and portfolio risk levels. Unlike prior studies on this topic, by using a simultaneous equations model, the endogeneity of both capital and portfolio risk is explicitly recognized, and as such, the impact of possible changes in bank capital ratios on risk in a bank's portfolio can be examined.
Keywords: capital regulation
JEL Classification: G2, G3
Suggested Citation: Suggested Citation