Prompt Corrective Action (PCA) is a system of predetermined capital/asset ratios that trigger supervisory actions by a banking regulator. Our paper addresses the optimality of this regulation system by adapting a dynamic model of entrepreneurial finance to banking regulation. In a dynamic moral...

This paper provides a formal analysis of the choice between liquidation and recapitalization when firms get into financial difficulties. We introduce the possibility of a costly recapitalization into a model of dynamic financial contracting under moral hazard. We find that the firm is never...