The Financial Crisis and the Regulation of Finance
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The Financial Crisis and the Regulation of Finance


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Chapter 10: Early Intervention and Prompt Corrective Action in Europe

David G. Mayes


David G. Mayes INTRODUCTION The recent crisis has taught us (at least) five main lessons, all of which were known beforehand but not appreciated so graphically: 1. Banks can get into trouble extremely rapidly. The authorities therefore need to have extensive ‘pre-positioning’ if they are to handle the difficulty efficiently. Depositors need to be guaranteed almost uninterrupted access to their funds and full insurance of most deposits if bank runs are to be avoided. The whole system of prompt corrective action (PCA) needs to start early, before the capital triggers are reached, and hence requires a basis in risk assessment and market signals. It is necessary to be able to step into a bank and take it over before its capital is entirely depleted. If these were not enough, acting on cross-border banks is much more difficult as the tools and responsibilities are national, hence the chances of a disorderly failure are much greater. 2. 3. 4. 5. It is easy to extend the list. The major problems have largely occurred in ‘national’ banks yet the authorities had problems coping. When they reached cross-border banks the authorities often could not manage unless the home country was to assume responsibility and get on with the job, and their interests were in line with those of the other countries involved, or where the bank could be readily split into its national components as in the case of Dexia and Fortis. In the case of Lehman Brothers it was a case of ‘too...





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