arbiter
JournalsAccount

Preventing Defaults in Response to Deteriorating Bank Health: The Prompt Corrective Action Approach

Nishant Kashyap et al.

Contemporary Accounting Research2026https://doi.org/10.1111/1911-3846.70027article
FT50AJG 4ABDC A*
Weight
0.50

Abstract

Prior research shows that borrowers are more likely to default when their banks are financially distressed, particularly where contract enforcement is weak. We examine whether regulatory intervention in the form of Prompt Corrective Action (PCA), which seeks to improve bank health through enhanced monitoring, reverses such defaults. To address this question, we exploit the bright‐line entry thresholds in India's PCA regime using a regression discontinuity framework. We first show that such defaults exist in India. Our main result is that PCA intervention significantly reduces such defaults. The result is robust to variation in methodology and alternative definitions of bank health. Our evidence suggests that PCA reduces such defaults by credibly signaling to borrowers the likely restoration of bank health and continuity of lending relationships. Its effectiveness was reinforced by an earlier regulatory reform that improved the timeliness of loan‐loss provisioning, enhancing the credibility of enforcement. Overall, our findings suggest that PCA, when underpinned by credible financial reporting, can serve as an effective policy tool to curb strategic defaults.

Open via your library →

Cite this paper

https://doi.org/https://doi.org/10.1111/1911-3846.70027

Or copy a formatted citation

@article{nishant2026,
  title        = {{Preventing Defaults in Response to Deteriorating Bank Health: The Prompt Corrective Action Approach}},
  author       = {Nishant Kashyap et al.},
  journal      = {Contemporary Accounting Research},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1111/1911-3846.70027},
}

Paste directly into BibTeX, Zotero, or your reference manager.

Flag this paper

Preventing Defaults in Response to Deteriorating Bank Health: The Prompt Corrective Action Approach

Flags are reviewed by the Arbiter methodology team within 5 business days.

Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.