Beyond US Basel Capital Regulations

US Prompt Corrective Action Requirements

In addition to the implementation of the Basel Capital Accords, US banks are subject to PCA requirements. The PCA regulatory regime was established pursuant to the Federal Deposit Insurance Corporation Improvement Act of December 1991 (FDICIA) and it became effective in December 1992. The FDICIA requires insured depository institutions (IDIs) and federal banking regulators to take "prompt corrective action" to resolve capital deficiencies at IDIs.

Table 6 shows the old and new capital ratios that are associated with the different categories calling for the various regulatory actions to resolve capital deficiencies. The major change is that a stricter measure of capital (CET1) than the previous Tier 1 capital ratio was introduced by eliminating some components that had previously counted as capital. In addition, the associated ratios for the new measure as compared to the previous measure have been increased, at least for Tier 1 capital. The new PCA ratios became effective on 1 January 2015, for all banks. As Table 6 indicates, banks are placed into one of five categories depending on their leverage and risk-based capital (RBC) ratios. Well-capitalized banks are those banks that meet all five thresholds and are not subject to formal action to maintain a specific capital level. Banks that are less than well-capitalized are subject to increasingly stringent provisions to resolve capital deficiencies as their capital ratios decline. The regulatory authorities of banks that become critically undercapitalized must within 90 days appoint a receiver or take other such actions that would better serve the purposes of PCA (and review such actions every 90 days). Lastly, the standards for determining whether a BHC is well-capitalized are not established.

Table 6. US Prompt Corrective Action (PCA), Old and New.

PCA Threshold Old PCA Categories (IDIs) a New PCA Categories (IDIs) b
Tier 1 Leverage (%) Tier 1 RBC (%) Total RBC (%) Tier 1 Leverage (%) Tier 1 Capital (%) Common Equity Tier 1 RBC (%) Total RBC (%) Supplementary Leverage Ratio (AA/IDIs only)
Well capitalized ≥5.0 ≥6.0 ≥10.0 ≥5.0 ≥8 ≥6.5 ≥10.0 n/a
Adequately capitalized ≥4.0 ≥4.0 ≥8.0 ≥4.0 ≥6 ≥4.5 ≥8.0 ≥3
Undercapitalized <4.0 <4.0 <8.0 <4.0 <6 <4.5 <8.0 <3
Significantly undercapitalized <3.0 <3.0 <6.0 <3.0 <4 <3.0 <6.0 n/a
Critically undercapitalized tangible equity/total assets ≤ 2% n/a

Note: AA = advanced approaches, IDI = insured depository institution, n/a = not applicable, RBC = risk-based capital. Tangible equity is Tier 1 capital plus non-Tier 1 perpetual preferred stock. Also, the supplementary leverage ratio becomes effective 1 January 2018. a See Federal Register 1992. b See Federal Register 2013.

What has not changed is the "critically undercapitalized" category. This may continue to pose challenges to the effectiveness of PCA. Balla et al. show that the FDIC has been adhering to the PCA in the sense that the average amount of tangible capital relative to assets for failed banks increased from –2 percent in the 1986–1992 period to 1.4 percent in the 2007–2013 period. However, they also show that the costs of closure were higher during the latter period. Cole and White report that the FDIC estimated that the cost of closure during the most recent crisis equaled 23.8 percent of total assets and estimated that about 37 percent of the $49.8 billion costs of closure was due to delaying closure of weak banks. Cole and White suggest this may reflect problems in generally accepted accounting principles (GAAP) and also that a more effective PCA reform might focus on increasing provisions, so that banks do not overstate the book value of their capital or including non-performing assets in capital ratios.