As the Basel III reforms, which come into effect from 2012, place emphasis on default risk, assessing the impact of Prompt Corrective Action (PCA) on default risk is of practical relevance. We provide strong evidence that both the dynamic and the contemporaneous impact of the PCA-defined tier 1...

This paper examines whether Prompt Corrective Action (PCA) was effective in reducing default and credit risk in U.S. banking. We employ parametric, non-parametric, nonlinear and switching cointegration tests and a general-to-specific testing procedure to examine if PCA-defined bank ratios and...

We explore the link between the default risk and equity prices for the U.S. aggregate banking sector over the last 30 years using a regime switching methodology which allows for changes in regulation and the recent financial crisis. We reveal that the default risk exercises a causal effect on...