Can Prompt Corrective Action Rules Work in the Developing World?

Abstract

A major weakness of bank regulation is “regulatory forbearance,” which is partly attributable to the scope for discretionary intervention by bank regulators. Therefore, bank regulation might be improved by subjecting intervention policy to a set of rules, such as the “Prompt Corrective Action” (PCA) rules in the US. The introduction of PCA rules is under consideration in a number of developing countries (DCs), stimulated by costly bank failures. This paper examines the potential benefits and feasibility of incorporating PCA rules into banking regulation in DCs. The paper concludes that PCA rules can improve bank regulation in DCs if introduced as part of a comprehensive set of prudential reforms which strengthens the operational independence of the bank regulators, improves their on-site examination capacities, strengthens accounting standards and raises public and political understanding of the need for strong and impartial bank regulation.