Conclusions

Abstract

The current crisis in the thrift industry is at least in part the consequence of a flawed deposit insurance system. The deposit insurance contract provides incentives for thrifts to bear risk, especially when they are thinly capitalized, because insurance premiums do not vary with risk. Unless the underlying problem with the pricing of deposit insurance is dealt with as part of the solution to the current crisis, there will undoubtedly be future economic shocks that create future crises. Therefore, risk based premiums and higher capital requirements for high risk investments should be introduced as features of the insurance contract. Efforts by FSLIC to improve monitoring of asset risk are also appropriate.