Topic
Prompt Corrective Action
About: Prompt Corrective Action is a research topic. Over the lifetime, 146 publications have been published within this topic receiving 5164 citations.
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TL;DR: In this paper, the authors assess two broad and competing theories of government regulation: the helping hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach according to where government regulates to support political constituency.
1,665 citations
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TL;DR: In this paper, the authors assess two broad and competing theories of government regulation: the helping hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach according to where government regulates to support political constituency.
Abstract: The authors draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies. First, the authors assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following: Regulations on bank activities and the mixing of banking and commerce. Regulations on entry by domestic and foreign banks. Regulations on capital adequacy. Design features of deposit insurance systems. Supervisory power, independence, and resources; stringency of loan classification; provisioning standards; diversification guidelines; and powers to take prompt corrective action. Regulations governing information disclosure and fostering private sector monitoring of banks. Government ownership of banks. The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing-hand view of regulation than with the helping-hand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control.
853 citations
TL;DR: Barth et al. as mentioned in this paper assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grasping-hand view, which regulates to support political constituency, and assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector.
Abstract: The regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control. Barth, Caprio, and Levine draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies. First, the authors assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following: - Regulations on bank activities and the mixing of banking and commerce. - Regulations on entry by domestic and foreign banks. - Regulations on capital adequacy. - Design features of deposit insurance systems. - Supervisory power, independence, and resources; stringency of loan classification; provisioning standards; diversification guidelines; and powers to take prompt corrective action. - Regulations governing information disclosure and fostering private sector monitoring of banks. - Government ownership of banks. The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing-hand view of regulation than with the helping-hand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control. This paper - a joint product of Finance, Development Research Group, and the Financial Sector Strategy and Policy Department - is part of a larger effort in the Bank to analyze the effect of financial sector regulation on development. The authors may be contacted at jbarth@business.auburn.edu, gcaprio@worldbank.org, or rlevine@csom.umn.edu.
418 citations
TL;DR: In this article, the authors analyzed the accuracy of the risk-based capital formula for property-liability insurers that was adopted in 1993 by the National Association of Insurance Commissioners and conducted a logit analysis on a large sample of solvent and insolvent insurers spanning the period 1989-1993.
Abstract: This paper analyzes the accuracy of the risk-based capital formula for property-liability insurers that was adopted in 1993 by the National Association of Insurance Commissioners (NAIC). A logit analysis is conducted on a large sample of solvent and insolvent insurers spanning the period 1989–1993. Predictive accuracy is very low when the ratio of NAIC risk-based capital to actual capital is the sole indendent variable in the logit analysis, but accuracy improves significantly when the components of the formula and variables for firm size and organizational form are used as regressors. Improvements in the formula are needed to facilitate prompt corrective action and reduce insolvency costs.
182 citations
TL;DR: In this paper, the authors show that from 1984 through 1989, the vast majority of banks exhibiting a high risk of insolvency would not have been considered under-capitalized based on the current risk-based capital (RBC) standards, and so would not be subject to mandatory corrective actions under FDICIA.
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.
114 citations