The term signifies a predefined framework of supervisory measures instituted by regulatory bodies when a financial institution’s key financial metrics deteriorate beyond established thresholds. These actions are designed to address weaknesses and resolve problems quickly, aiming to protect depositors and maintain the stability of the financial system. An example includes imposing restrictions on asset growth or requiring the institution to raise additional capital.
The value of this system lies in its ability to facilitate early intervention, mitigating the risk of more severe financial distress. It helps to limit potential losses, thereby bolstering public confidence in the banking sector and preventing wider economic repercussions. Historically, it developed as a response to financial crises, recognizing the need for proactive measures rather than reactive responses to institutional failures.
