to cover the extreme - loss tail of the distribution of possible outcomes and thus the perceived costs of systemic risk. since so high a rate appears politically infeasible, the subsidy in deposit insurance cannot be fully eliminated. moreover, no private insurer will be able to match the actual fdic premium and cover its risk from the extreme - loss tail. obviously, if premiums were fully priced, the level of insured deposits would be significantly lower. but even if we have chosen not to go that far, more risk - sensitive pricing is nonetheless helpful, and prudential regulation has already begun to move in the right direction to reduce the safety net subsidy. it has increasingly become risk - focused on processes, policies, and procedures for managing risk – with transaction - testing to ensure these are being used – rather than on - balance - sheet analysis. supervision and examination policies are on a track to become even more risk - focused with the evolving new basel capital accord. as you know, the first pillar of the proposed new accord contemplates that the larger, more sophisticated banks will use internal risk classifications of their credit portfolios, validated by the supervisor, for pricing, loan - loss reserving, and most important, for determining their minimum capital requirements. this approach moves us further down the road of making capital requirements sensitive to an individual bank's risk profile and exposure. and, it seeks to do so in a way that ensures that there are not, as it were, two sets of books, by requiring that the parameters used to determine regulatory capital are the same parameters that management also uses to run the bank. far more important for my topic today is that the proposed capital requirement better simulates what an informed market and management would require for bank capital. as a result, minimum regulatory equity capital might fall for some banks but rise for others on the basis of their portfolio risk profiles. what needs underlining is the new factor in determining credit risk policies : taking on more risk will increase capital costs. in addition, regulatory capital minimums, even when more risk sensitive, remain minimums, and the proposed accord assumes that banks will hold a level of economic capital above those minimums. economic capital, determined by management, will reflect managers'desired securities ratings and cost of funds, as well as their banks'operational and other noncredit risks. supervisory oversight, however, will review actual or economic capital in light of examiners'evaluation of banks'internal models and their policies

we know it is a product of the great depression, and that economic disaster was the result of a combination of events unlikely to recur. in addition, the moral - hazard costs of the safety net are significant. nonetheless, the safety net, by providing ongoing access to real resources, has become capitalized into a broad spectrum of asset values. it is now an embedded part of our social and economic framework, for good or ill. viewed in its most favorable light, the safety net does guard against those once - in - a - century or so breakdowns in market forces, however induced. the long absence of a fire, or of an economic and financial conflagration, does not suggest that we should cancel the fire insurance policy or the safety net. but, i do think that as a society we ought to explore what we can do at the margin to retain the economic benefits and lower the economic costs of the safety net. we ought to be careful that we do not, through safety net expansion, increase the marginal costs more than the marginal benefits. a look back to the pre - safety - net era might be helpful as part of that exploration. i have in the past suggested that to lessen the moral hazard of the safety net and to improve supervision and regulation, public policy should attempt to simulate, in so far as possible, what markets alone might do, or at least to create market - type incentives. to do so would, of course, move us closer to the period of pre - safety - net incentives while avoiding, one hopes, the distortions of that regime. for example, solvent banks must remain assured that they will be able to liquefy their sound assets at times of liquidity distress, but ideally, we would otherwise like banks to be managed as if there were no safety net. that is, if we retain the safety net, we ought to price and otherwise manage it so that the banking system is as close as possible to the one the market alone would provide. clearly one of those steps would be better pricing of safety - net access. the federal deposit insurance corporation has proposed some useful initiatives to move in that direction. the usual suggested premiums for deposit insurance are, of course, far from those that would fully eliminate the subsidy that insurance provides to depository institutions and their borrowers and depositors, especially at times of financial crisis. indeed, to eliminate the subsidy in deposit insurance, the fdic insurance premium would have to be set high enough