Failing prompt corrective action

The prompt corrective action (PCA) provisions of the 1991 Federal Deposit Insurance Improvement Act were enacted to deter future financial crises and to minimize losses to the Federal Deposit Insurance Corporation (FDIC). They have failed to do so. To determine why the article examines 50 material loss reviews made available online from 2007 through 2009 by the inspectors general of the federal banking agencies. The reviews find that small and medium-sized banks failed not by participating in new securities and markets, but for long-acknowledged reasons. Their oversight was almost universally lax. Failed institutions avoided PCA restraints by artificially maintaining their well-capitalized status, sometimes with supervisory assistance, almost until they failed. Their supervisors had not employed their discretionary powers to discipline them. The article concludes by raising philosophical questions regarding supervisors' reluctance to use their discretionary authority and makes some practical suggestions for improving their performance.