Once deposit insurers are better able to measure the risk profile of a bank, as opposed to assuming its risk to the fund from its current financial condition, a more meaningful system of risk-based premiums can be introduced. Traditional insurance pricing is based on risk profiles that are independent of the performance of the individual insured (for example, young drivers pay higher premiums even if they have a good driving record). Although a well-managed bank may take greater risks and make greater profits, it may nevertheless pose a greater risk to the insurance fund than a less profitable conservative bank. A risk-based premium system should recognize this risk difference and not just seek to charge high premiums to banks that may be in imminent danger of failing or are perceived to have weakened financially. The use of market data should help to identify the risk differences among banks that are equally profitable and well capitalized.
The views expressed herein are the author's and do not necessarily reflect those of the Federal Deposit Insurance Corporation.
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Book title: The New Financial Architecture:Banking Regulation in the 21st Century. Contributors: Benton E. Gup - Editor. Publisher: Quorum Books. Place of publication: Westport, CT. Publication year: 2000. Page number: 142.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.