Prompt Corrective Action Used In Just 30% of Capital-Poor Banks

WASHINGTON - A sampling of undercapitalized institutions showed that the Federal Deposit Insurance Corp. took prompt corrective action against just 30% of the banks subject to the supervisory law.

The FDIC's inspector general selected 43 undercapitalized institutions, and found the FDIC imposed prompt corrective action against only 13. However, 39 of the 43 banks were subject to some other enforcement action, according to the inspector general's report.

"During our review of the FDIC's implementation of PCA, we noted that DOS (division of supervision) was less likely to recommend the use of PCA notices or directives than other supervisory actions," the inspector general's report said.

Prompt corrective action, effective Dec. 19, 1992, was part of the FDIC Improvement Act of 1991. The provisions impose increasingly stiff penalties as a bank's capital declines. Once capital reaches 2%, prompt corrective action gives the FDIC the power to seize an institution.

When the provisions were being debated in 1991, banking industry leaders feared prompt corrective action would become the regulators' most potent weapon.

But after more than two years, prompt corrective action has proved to be a little-used tool. Part of the reason can be chalked up to record high capital levels: Few banks are undercapitalized, which the regulations define as less than 8% total capital or less than 4% Tier 1 equity.

"I think there was too much fear of it," John Stone, the FDIC's executive director of supervision and resolution, said of prompt corrective action. "You're not seeing much use because of the condition of the industry."

The banking industry set new records for annual earnings in 1992 and 1993 and is expected to set yet another in 1994.

While prompt corrective action focuses on improving an institution's capital, that's not always the cause of the problem, the report noted. Other supervisory actions may be substituted for PCA, the report said, because they can address both capital and other problems.

Mr. Stone agreed, but noted that if conditions change and the industry's capital starts to slip again, "you will see PCA used much more extensively."

The inspector general found that other enforcement actions can be put in place earlier, before a bank's capital dips. The FDIC's staff is more familiar with other enforcement actions and that, too, may contribute to the fact that prompt corrective action is not used that often.

"(P)CA powers may be less efficient than other supervisory powers and may not always be needed when other supervisory actions adequately address problem bank concerns," the inspector general found. "However, PCA can be used effectively to supplement other supervisory powers and should be used more often as FDIC gains experience with these new powers over time."

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