and thrift institutions have become so similar, it makes no sense to continue the separate funds. separate funds reflect the past but neither the present nor the future. merging the funds would diversify their risks, reduce administrative expense, and widen the fund base of an increasingly concentrated banking system. most important, because banks and thrift institutions receive the same level of federally guaranteed insurance coverage, the premiums faced by each set of institutions should be identical as well. under current arrangements, the premiums faced by equally risky institutions could differ significantly if one of the funds falls below the designated reserve ratio of 1. 25 percent of insured deposits and the other fund does not. should that occur, depository institutions would be induced to switch charters to obtain insurance from the fund with the lower premium, a result that could distort our depository structure. the federal government should not sell a single service, like deposit insurance, at different prices. 2. reduce statutory restrictions on premiums current law requires the fdic to impose higher premiums on riskier banks and thrift institutions but prevents it from imposing any premium on well - capitalized and highly rated institutions when the corresponding fund's reserves exceed 1. 25 percent of insured deposits. the board endorses the fdic recommendations that would eliminate the statutory restrictions on risk - based pricing and allow a premium to be imposed on every insured depository institution, no matter how well capitalized and well rated it may be or how high the fund's reserves. the current statutory requirement that free deposit insurance be provided to well - capitalized and highly rated institutions when the ratio of fdic reserves to insured deposits exceeds a predetermined ratio maximizes the subsidy provided to these institutions and is inconsistent with efforts to avoid inducing moral hazard. put differently, the current rule requires the government to give away its valuable guarantee to many institutions when fund reserves meet some ceiling level. this free guarantee is of value to institutions even when they themselves are in sound financial condition and when macroeconomic times are good. at the end of the third quarter of last year, 91 percent of banks and thrift institutions were paying no premium. that group included many institutions that have never paid a premium for their, in some cases substantial, coverage, and it also included fast - growing entities whose past premiums were extraordinarily small relative to their current coverage. we believe that these anomalies were never intended by the framers of the deposit insurance fund act of

##ring is likely to result in risk appetite and risk - taking being lower than reality might suggest. risk will be over - priced. today, the very disaster myopia that caused the crisis may be retarding the recovery. disaster myopia may be more potent in the markets than on the motorways. asset prices are guesses about the future. faced with uncertainty about the future, market participants form these guesses using their own heuristics. one such heuristic is the “ popular narrative ” – a simple story that aims to make sense of reality. risk on / risk off is precisely such a popular narrative. 4 the effect of popular narratives is to increase psychological contagion in financial markets. simple stories generate market mood swings. the greater the uncertainty, the more compelling the simple story and the greater the amplitude of these mood swings. these reinhart and rogoff ( 2010 ). for example, tversky and kahneman ( 1974 ). for example, akerlof and shiller ( 2009 ), tuckett bis central bankers ’ speeches swings in turn result in a detachment of risk perceptions, and hence asset prices, from reality. financial trauma, like personal trauma, can increase this detachment from fundamentals. for those who lived through it, the great depression had a lasting effect on financial risk - taking. “ depression babies ” have been shown to seek less risky capital structures and to avoid financial stocks. 5 the scarring effects of the great depression on risk attitudes help explain the excess premium demanded by equity investors during the previous century. 6 the great depression left risk - taking scars that lasted a lifetime. the great depression has now been lost from most investors ’ experience sample. indeed, that fact might help explain another popular narrative from the past – the great moderation. but the great depression has recently been replaced in investors ’ experience sample by the great recession. whether this will spawn an era of “ recession babies ”, with a permanently lower appetite for financial risk - taking, remains to be seen. but past evidence suggests that any recovery in risk appetite might take time – more time than fundamentals would imply. all of these behavioural elements have come together in today ’ s financial markets – disaster myopia, intrinsic uncertainty and deep trauma. this may help explain why risk - takers have their foot poised on both brake and accelerator, why risk capital is in stop - start mode. that implies a risk of heavy and persistent financial congestion in the