-
International regulators worked hard, agreed in December to impose tough standards and then gave bankers eight years to meet them. But the reality is something much less concrete.
February 2
Another valuable piece ["
With regard to Prompt Corrective Action, you are correct that it doesn't work. Almost every new bank failure shows that it doesn't work. PCA was purportedly designed to decrease the cost to the FDIC for the failure of a bank by getting the regulators to act and shut down a bank before the bank fell too far into the red. The actual experience of the last couple of years shows if anything that the losses in failed banks have gotten worse, with the average failed bank imposing something above a 20% loss to the FDIC (in terms of the FDIC's insured deposit exposure to the bank). Up until recently, the average loss was closer to 12% (still higher than what PCA contemplated).
I think that PCA doesn't work because it focuses on the wrong thing. It is fixated on capital, which is a very lagging and extremely imprecise indicator, and PCA's solution is largely go and get more capital. True, every failed bank runs out of capital, but that is like saying that every ship that sinks has too much water in it. To continue the analogy, the PCA prescription is largely pump out the water rather than fix the leaks.
A better measure of bank condition would be earnings. It is the lack of earnings that is the leak (either because expenses are too high or revenues are too low, or a combination of both). If regulators were paying more attention to earnings they might recognize more quickly factors that were causing higher costs and other factors that were eroding earnings. But maybe they don't want to go there, because it would reveal that they, the regulators, are the source of much of the new and higher costs and the erosion of earnings. But PCA will never work as long as it continues to focus on capital, and there will be reform measure after reform measure to fix the wrong things.
Wayne A. Abernathy
Executive Vice President
Financial Institutions Policy and Regulatory Affairs
American Bankers Association
