Assessing the Impact of Prompt Corrective Action on Bank Capital and Risk

[...]This paper examines the impact that the PCAstandards had on bank portfolios following the passage ofFDICIA in 1991. To do this, the simultaneous equationsmodel developed by Shrieves and Dahl (1992), and latermodified by Jacques and Nigro (1997) to study the impactof risk-based capital, is used to examine how PCA simultaneouslyinfluenced bank capital ratios and portfolio risk levels. Unlike prior studies on this topic, by using a simultaneousequations model, the endogeneity of both capitaland portfolio risk is explicitly recognized, and as such, theimpact of possible changes in bank capital ratios on risk ina bank’s portfolio can be examined.[...]