An oversight report Thursday called for changes to prompt corrective action, saying the process for regulating troubled banks has not prevented losses to the Deposit Insurance Fund.
Prompt correction action, or PCA, has been the standard route for regulators since the savings-and-loan crisis of responding to institutions when they deteriorate. As a bank's Camels rating goes up and its regulatory capital ratios decline, regulators are required to increase scrutiny through enforcement orders and other measures. The heightened steps are meant to trigger improvements, or the bank's prompt closure, before losses multiply.
But the Government Accountability Office said since 2008, PCA at banks that ultimately failed did not do much to stem DIF losses, compared with failed banks that had not gone through PCA.
The report reiterated concerns that PCA is too dependent on capital levels, which as a lagging indicator result in enforcement that, the GAO said, is often too late.
"Problems with the bank's assets, earnings, or management typically manifest before these problems affect bank capital," the report said. "Once a bank falls below PCA's capital standards, a bank may not be able to recover regardless of the regulatory action imposed."
The government watchdog said regulators should consider steps to ensure PCA is triggered earlier. Those steps could include making the capital categories under PCA — ranging from "well-capitalized" to "critically undercapitalized" — more risk-sensitive; increasing the ratios for each capital category; and including another trigger for PCA such as asset quality or asset concentration.
"Without an additional early warning trigger, the regulators risk acting too late, thereby limiting their ability to minimize losses to the DIF," the GAO said.
