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TITLE
"A Risk-Based Deposit Insurance System," Journal of Insurance Issues, Rochester, David P. and David A. Walker, June 1986, Vol. IX, No. 2: 1-20.

ABSTRACT
The assessments and the role for Federal and State deposit insurance funds have been public policy concerns since the banking holiday of 1932 and the Federal Deposit Insurance Act of 1933. The problems for state insured institutions are the subject of the recent thrift institution insurance controversy in Ohio. The Federal Home Loan Bank Board has increased federally insured thrifts' premiums and the FDIC has considered various means of replenishing its reserves. Ultimately, state deposit insurance problem become national problems because the FSLIC or the FDIC is asked to provide assistance.

Thus a modified deposit insurance system is needed. A revised deposit insurance system that assists the regulators and motivates institutions to take responsibility for their activities should (1) be simple to implement and understand (2) and not make weaker institutions worse off at the expense of other institutions. Regulators should be able to implement a revised insurance system without legislative approval so that optimal results will occur promptly.

This study provides for adjusting the deposit insurance premium cost to credit a risk-based dividend toward an institution's current insurance premium. Thus, the net or effective insurance premium for each association becomes a risk-based premium. For each S&L, a financial risk index is developed and employed to determine its appropriate dividend. A simple model is developed utilizing only the readily available, and no legislation is required. A dynamic system is also developed for distributing dividends after a risk based system is accepted.