Research In Financial Supervision' Prompt Corrective Action

Finance is a hige-risk career,hazard springs from troubled financial institutions is characterized with sharp deterioration and rapid spread. In the past decades, as the financial institutions continue to fail throughout the world,the effective financial supervision has received increasingly concern. Critics argue that resulting regulatory forbearance produces delayed actions toward troubled institutions and causes higher costs when a institution is ultimately resolved.To preclude regulatory forbearance and strengthen the supervision of financial institution, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 requires the federal insured depository institution to implement a capital-based policy of prompt corrective action (PCA). This is a new statutory framework for financial supervision detailed early intervention and corrective action by regulators in dealing with troubled institutions,which provides the supervisors with an unambiguous goal: "to resolve the problems of insured depository institutions at the least possible long-term cost to the deposit insurance fund." Under this framework, each bank must be placed in one of five zones based on its regulatory capital position, undercapitalized banks are subject to increasingly severe corrective sanctions as their capital ratios deteriorate. Compare with actions were up to the discretion of supervisors in the past, PCA is reasonably effective mandatory sanctions for identifying troubled banks and taking corrective actions. Over the past years, many countries and regions around the world have adopted a system of prudential PCA. However, our country to this day still has neither legislation nor practice about PCA.This paper attempts to explore the possibility of recomment for PCA in China and design the framework for it. Specificly, this paper is made up of three parts:The first part of paper is to introduce PCA and its overall merits, including its mode,structure,historical development, and practice in some nations and regions.The second part of paper focuses on the kernel ideology of PCA: to preclude regulatory forbearance. Practionof regulatory forbearance, which causes undercapitalized bank to engage in increasingly risky behavior in the delayed time to resolve. But supervisory mode based on regulatory discretion cannot put up with it. PCA departs from the above-mentioned supervisory mode, of which mandatory intervention in undercapitalized institutions combats supervisory forbearance effectively and limit to excessive loss. To be further, this part analyses several disputed theoretical and practical problems.The third part of paper discusses on preconditions needed for the adoption of an effective PCA. Then address considerations about the reform of financial supervision through analyzing the relevant problems of our country'financial supervision. Last, derives the preliminary formula for PCA to suit for our national conditions.