Would Basel II require the agencies to consider changes to the Prompt Corrective Action leverage ratio requirements?
– The prompt corrective action ratios (PCA) were designed by FDICIA and FIRREA to serve as a trigger for supervisory action. As such, these ratios serve as benchmark for safety under the Basel accord of 1988. These ratios, which were calculated under the existing capital rules, included a minimum total risk based capital ratio of 8%. This target was set considering the existing regulatory capital framework, which is not as risk sensitive as the new rules. The question above considers whether the 8% target can also be applied to the new Basel II capital framework which is risk sensitive. Since the Basel II capital calculation is risk sensitive, banking organizations which invest in predominantly lower risk assets should see an improvement in their capital ratios. Conversely, those institutions, which have invested in predominantly higher risk assets, will see a reduction in their capital ratios under the new risk sensitive rules. Therefore, the new capital rules will emphasize the safet
