Munich Personal RePEc Archive

Prompt corrective action provisions: are insurance companies and investment banks next?

Tatom, John / A. (2008): Prompt corrective action provisions: are insurance companies and investment banks next? Published in: Research Buzz , Vol. Vol. 4, No. Issue 5 (May) (30. May 2008): pp. 1-8.

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Abstract

In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Act provided for risk-based deposit insurance premiums, put explicit limits on the application of a “too big to fail” principle for banks and required that examiners implement “prompt corrective action” (PCA) standards for banks. Essentially these steps were to improve the functioning of the FDIC, especially removing discretion of the examiners in the process of addressing the risk of failure of banks and providing explicit requirements of managing the deteriorating risk of failure and providing for rising insurance premiums for such banks. In particular, PCA established a set of capital benchmarks and required regulator actions that removed privileges for banks to manage their capital and payments of income to share holders and bank creditors as the capital position of the bank deteriorated and the risk of failure rose. In effect regulators could take preemptive action to keep banks from depleting their capital as their capital positions deteriorate.

These provisions have drawn increasing public attention in the past year for very different reasons. First, Senate Bill 40, The National Insurance Act (NIA), which provides new opportunities for insurance companies to obtain their charters and to be regulated by a federal government entity instead of only the state governments, also requires that the new federal regulator develop and apply prompt corrective action provisions to the supervision of federally chartered insurance companies. The second reason that these provisions have drawn attention recently is the near failure and sale of Bear Stearns. The Federal Reserve helped arrange the sale of Bear Stearns in March 2008, with the sale to be completed shortly, to preempt its failure and consequent effects on other financial institutions. At about the same time the U.S. Department of Treasury released it long awaited “Blueprint for a Modernized Federal Financial Regulatory Structure,” that called for the Board of Governors of the Federal Reserve System to have broad regulatory power over all financial institutions on issues related to financial market stability. These actions call attention to the absence of regulatory oversight powers by the Fed, in particular, enabling legislation that would allow the Fed to close investment banks or other failed or failing institutions in the same way that they can or must close such banks. PCA is on the horizon for insurance companies, investment banks and other financial institutions subject to regulation.

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