Robert A. Eisenbeis and Larry D. Wall
Working Paper 2002-31
December 2002

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The prompt corrective action provisions in FDICIA 1991 provide the supervisors with an unambiguous goal: ?to resolve the problems of insured depository institutions at the least possible long-term cost to the deposit insurance fund.? Yet performance of the regulators in achieving this goal has been lacking in that substantial losses continue to be imposed on the insurance funds when banks fail. Is PCA misguided, or are there incentive defects in the law and how the requirements are being administered? This paper analyzes these issues in the context of recent proposals to reform the deposit insurance system.

JEL classification: G2, L5

Keywords: deposit insurance, bank supervision, capital adequacy regulation

The authors gratefully acknowledge William Estes, Alton Gilbert, Lynn Shibut, Myron Kwast, and Allen Berger. They also thank Lisle Cormier for research assistance. The views expressed here are the authors? and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors? responsibility.

Please address questions regarding content to Robert A. Eisenbeis, Sr. Vice President and Director of Research, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E. Atlanta, Georgia 30309-4470, 404-498-8824, or Larry D. Wall, Financial Economist and Policy Adviser, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8937,