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After hearing both the papers prepared for this conference and the discussions that followed the presentations, I want to reflect briefly on several different issues discussed in Perspectives on Safe and Sound Banking. I plan to first focus on the issues that were probably, in hindsight, overemphasized, those that were perhaps underemphasized, and those that were not fully appreciated but subsequently turned out to be important. Finally, I want to raise issues that should be on any agenda for the future.
Issues Overemphasized in the Study
Risk-based deposit insurance. A key issue in the finance literature and in the study was the desirability of gearing deposit insurance to risk and using options pricing theory to price that risk appropriately. While risk-based premiums were adopted in the Federal Deposit Insurance Corporation Improvement Act (FDICIA), implementation has proved to be problematic. Premiums are arguably too low and are collected only from more risky institutions. Beyond this, however, are two issues that limit risk-based pricing as a useful means to control risk taking. The first is the realization that appropriate pricing depends upon not only the ability to measure risk but also to close an institution promptly when it becomes insolvent. Second, effective risk monitoring and control involves a trade-off between the costs of monitoring a bank's risk exposure continually against both the expected costs of that monitoring and expected losses should an institution become insolvent between examinations or inspections.
Revisions to regulatory agency structure and lender of last resort. The report recommended several changes in bank regulatory agency structure, including creating a competing deposit insurance option to be administered by the Office of the Comptroller of the Currency, parceling out lender-of-last-resort administration to the insurance agencies using funds drawn from the Federal Reserve, and taking the Federal Reserve out of the prudential supervision area. It probably is not practical to consider such reforms, given that the United States has still not seen fit to combine depository institution insurance funds, and only the central bank can provide credible lenders-of-last-resort funds. However, two issues are important. First was the suggestion that the insurance funds should have a primary role in banking supervision because they have the strongest incentives to monitor bank risk exposures. In the United States, the Federal...