Skip to main content

July/August 1992, 
Vol. 74, No. 4
Posted 1992-06-01

The Effects of Legislating Prompt Corrective Action on the Bank Insurance Fund


R. Alton Gilbert investigates whether recent legislation is likely to reduce the losses of the Bank Insurance Fund (BIF). The Federal Deposit Insurance Corporation Improvement Act of 1991 mandates prompt corrective action by the federal supervisors of insured depository institutions when the capital ratios of these institutions fall to relatively low levels. The mandate for prompt corrective action is intended to reduce the losses of the BIF. Gilbert examines whether this legislation is likely to have such an effect. The prompt corrective action mandate is based on the assumption that, the longer a bank remains in operation with a low capital ratio before it fails, the larger the ratio of BIF loss to total assets. Gilbert shows that the data do not support this assumption. His evidence indicates that there is no relationship between the length of time banks operated with low capital ratios before they fail and the BIF’s loss ratios. These results raise doubt about whether the recent legislation will reduce the BIF’s losses.