insurance premiums would have to be calculated. indeed, pricing deposit insurance risks to fully fund potential losses - pricing to eliminate subsidies - could well require premiums that would discourage most depository institutions from offering broad coverage to their customers. since the congress has determined that there should be broad coverage, the subsidy in deposit insurance cannot be fully eliminated, although we can and should eliminate as much of the subsidy as we can. i note that the difficulties of raising risk - based premiums explain why there is no real private - insurer substitute for deposit insurance from the government. no private insurer would ever be able to match the actual fdic premium and cover its risks. a private insurer confronted with the possibility, remote as it may be, of losses that could bankrupt it would need to set especially high premiums to protect itself, premiums that few, if any, depository institutions would find attractive. and if premiums were fully priced by the government or the private sector, the depository institutions would likely lower their offering rates, thereby reducing the amount of insured deposits demanded, and consequently the amount outstanding would decline. 3. relaxing the reserve ratio regime to allow gradual adjustments in premiums current law establishes a designated reserve ratio for bif and saif of 1. 25 percent. if that ratio is exceeded, the statute requires that premiums be discontinued for well - capitalized and highly rated institutions. if the ratio declines below 1. 25 percent, the fdic must develop a set of premiums to restore the reserve ratio to 1. 25 percent ; if the fund ratio is not likely to be restored to its statutorily designated level within twelve months, the law requires that a premium of at least 23 basis points be imposed on all insured entities. these requirements are clearly procyclical : they lower or eliminate fees in good times, when bank credit is readily available and deposit insurance fund reserves should be built up, and abruptly increase fees sharply in times of weakness, when bank credit availability is under pressure and deposit fund resources are drawn down to cover the resolution of failed institutions. the fdic recommends that surcharges or rebates be used to bring the fund back to the target reserve ratio gradually. the fdic also recommends the possibility of a target range for the designated reserve ratio, over which the premiums may remain constant, rather than a fixed target reserve ratio and abruptly changing premiums. we support such increased flexibility and smoothing of changes in premiums. indeed

we viewed that action as insurance against the possibility that the still widespread weakness would become entrenched. with inflation expectations well contained, this additional monetary stimulus seemed to offer worthwhile insurance against the threat of persistent economic weakness and unwelcome substantial declines in inflation from already low levels. in the weeks that followed, financial market conditions continued to improve, but only haltingly. the additional monetary stimulus and the absence of further revelations of major corporate wrongdoing seemed to provide some reassurance to investors. equity prices rose, volatility declined, risk spreads narrowed, and market liquidity increased, albeit not to levels that might be associated with robust economic conditions. at the same time, mounting concerns about geopolitical risks and energy supplies, amplified by the turmoil in venezuela, were mirrored by the worrisome surge in oil prices, continued skittishness in financial markets, and substantial uncertainty among businesses about the outlook. partly as a result, growth of economic activity slowed markedly late in the summer and in the fourth quarter, continuing the choppy pattern that prevailed over the past year. according to the advance estimate, real gdp expanded at an annual rate of only ¾ last quarter after surging 4percent in the third quarter. much of that deceleration reflected a falloff in the production of motor vehicles from the near - record level that had been reached in the third quarter when low financing rates and other incentive programs sparked a jump in sales. the slowing in aggregate output also reflected aggressive attempts by businesses more generally to ensure that inventories remained under control. thus far, those efforts have proven successful in that business inventories, with only a few exceptions, have stayed lean - a circumstance that should help support production this year. indeed, after dropping back a bit in the fall, manufacturing activity turned up in december, and reports from purchasing managers suggest that improvement has continued into this year. excluding both the swings in auto and truck production and the fluctuations in non - motor - vehicle inventories, economic activity has been moving up in a considerably smoother fashion than has overall real gdp : final sales excluding motor vehicles are estimated to have risen at a 2¼ % annual rate in the fourth quarter after a similar 1¾ % advance in the previous quarter and an average of 2 % in the first half. thus, apart from these quarterly fluctuations, the economy has largely extended the broad patterns of performance that were evident at the time of my july testimony. most notably, output has continued to expand,