Bank Analysis School eBook

Appendix A: Prompt Corrective Action (PCA) Standards Background / Categories and Thresholds

PCA standards are long-standing regulatory guidelines that require banks to take corrective measures when their capital levels fall below certain thresholds. The goal is to prevent bank failures by imposing increasing restrictions and oversight as a bank’s capital deteriorates. As depicted in the table below, banks are assigned one of five capital designations based on their capital ratios.

Tier 1 Leverage Ratio

CET1 Capital Ratio

Tier 1 Capital Ratio

Total Capital Ratio

Prompt Corrective Action Category

Well Capitalized

5%

6.5%

8%

10%

Adequately Capitalized

4%

4.5%

6%

8%

Under Capitalized

< 4%

< 4.5%

< 6%

< 8%

Significantly Undercapitalized

< 3%

< 3%

< 4%

< 6%

Critically Undercapitalized

Tangible equity/Total assets ≤ 2%

Ramifications of falling below Well Capitalized Despite the name, being Adequately Capitalized triggers heightened scrutiny and significant restrictions compared to being well-capitalized. Consequences of falling below Well Capitalized status include:  Limitations on brokered and high-rate deposits  Adequately capitalized banks can only accept or renew brokered deposits with an FDIC waiver and cannot solicit high-cost deposits.  Undercapitalized banks are prohibited from accepting or renewing brokered deposits (no waivers).  Heightened regulatory scrutiny  Applications for new offices or other significant actions are likely to be denied.  May be subject to more frequent regulatory examinations to assess their condition.  Undercapitalized banks face operational restrictions related to asset growth, dividend payments, and executive compensation.  Closure  If a bank becomes Critically Undercapitalized, regulators may place the bank into conservatorship or receivership, leading to the closure of the institution. Community Bank Leverage Ratio (CBLR) The CBLR is a simplified capital measurement for community banks with less than $10 billion in assets 1 . Qualifying banks that opt into the CBLR framework and meet the minimum 9% Tier One Leverage Ratio are considered Well-Capitalized and are exempt from having to calculate and report the more complex risk based capital ratios.

1 Additional criteria to qualify for CBLR reporting include off-balance sheet exposures 25% or less of total assets and total trading assets plus trading liabilities of 5% or less of total assets. The vast majority of community banks meet these criteria.