Abstract
To lessen forbearance, the FDIC Improvement Act of 1991 (FDICIA) requires that undercapitalized banks be subject to prompt corrective actions. We show that from 1984 through 1989, the vast majority of banks exhibiting a high risk of insolvency would not have been considered undercapitalized based on the current risk-based capital (RBC) standards, and so would not have been subject to mandatory corrective actions under FDICIA. We present evidence suggesting the usefulness of the RBC ratios could be enhanced substantially by adopting an improved standard for loan loss reserve adequacy and modifying the RBC risk weights to account for the greater credit risks of problem assets.
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