Banks and issue of stressed assets: Why prompt corrective action is a must

Without appropriate supervisory constraints in place, such banks are in a position to delay the recognition of losses

Today, I wish to explain why Prompt Corrective Action (PCA) is an essential element of the Reserve Bank’s (and more generally, of a banking supervisor’s) financial stability framework.

Loss-absorption Role of Bank Capital

Before I discuss the Prompt Corrective Action approach, it would be useful to briefly talk about the critical role of bank capital in relation to the process of resolution of stressed banks.

In its simplest form, a bank balance-sheet has assets on the left hand side of the balance-sheet, and liabilities on the right hand side in the form of equity capital and deposits (and other forms of debt liabilities