Differentiating Among Critically Undercapitalized Banks and Thrifts

Abstract

In this article, we studied institutions insured by the Federal Deposit Insurance Corporation (FDIC) that crossed the 2 percent tangible capital threshold or failed between 1994 and 2000. We separated these banks into four groups (low-cost failures, high-cost failures, near-failures that survived, and near-failures that were purchased), and we analyzed differences among the groups. If there are consistent differences that separate failed banks (and particularly high-cost failed banks) from other seriously troubled banks, there may be opportunities to improve the regulatory treatment of troubled banks - either through a change in the PCA threshold for a critically undercapitalized bank or by other means. This article begins by providing background information, including a discussion of related literature and the tradeoffs associated with setting the threshold for critically undercapitalized banks. The article then discusses the data and methodology and reports the results of various comparisons across groups. The final sections provide concluding remarks and make recommendations.