David G. Mayes, María J. Nieto, and Larry Wall
Working Paper 2007-9
May 2007

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This paper discusses the institutional changes needed in Europe if prompt corrective action (PCA) is to be effective in supervising and resolving cross-border banking groups. The paper identifies these changes starting with enhancements in the availability of information on banking groups’ financial condition to prudential supervisors. Next, the paper considers the collective decision making by prudential supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank in a cross-border banking group falls below the minimum capital standard. Finally, the paper analyzes the coordination measures that should be implemented if PCA requires the bank to be resolved.

JEL classification: G21, K23, F23

Key words: bank supervision, prompt corrective action, European Union

The authors thank George Benston and Robert Eisenbeis for helpful comments on a preliminary draft as well as the participants in the LSE Financial Markets Group conference on prompt corrective action and cross-border supervisory issues (London, November 20, 2006) and the Banco de España conference organized by the European Central Bank and the Center for Financial Studies (Madrid, November 30–December 1, 2006). The views expressed here are the authors’ and not necessarily those of the Banco de España, the Bank of Finland, the Federal Reserve Bank of Atlanta, or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to David G. Mayes, University of Auckland and Bank of Finland, P.O. Box 160, Helsinki, Finland, 358-10-831-2569, david.mayes@bof.fi; María J. Nieto, Banco de España, Alcala 50, Madrid, Spain 28014, 34-91-338-5000, maria.nieto@bde.es; or Larry Wall, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8937, 404-498-8810 (fax), larry.wall@atl.frb.org.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.