MIMIC: A proposal for deposit insurance reform
| Published date | 01 April 2001 |
| Pages | 338-349 |
| Date | 01 April 2001 |
| DOI | https://doi.org/10.1108/eb025087 |
| Author | James A. Wilcox |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 9 Number 4
Journal of Financial Regulation
and Compliance. Vol. 9, No. 4,
2001, pp. 338-3349
® Henry Stewart Publications,
1358-1988
MIMIC: A proposal for deposit
insurance reform
James A. Wilcox
Received (in revised form): 3rd August, 2001
Kruttschnitt Professor of Financial Institutions, Haas School Of Business, UC Berkeley, Berkeley,
CA 94720-1900, USA; tel: 510.642.2455; e-mail: jwilcox@haas. berkeley. edu
James A. Wilcox is the Kruttschnitt Profes-
sor of Financial Institutions, Haas School
Of Business, University of California.
As Kruttschnitt Professor of Financial
Institutions, Dr Wilcox teaches banking,
risk management in financial Institutions,
and business conditions analysis. Dr
Wilcox is the former chief economist at the
US Office of the Comptroller of the Cur-
rency.
ABSTRACT
Here the author proposes
the Mutual Insurance
Model with Incentive Compatibility
(MIMIC). MIMIC is a model for deposit
insurance
that mimics
the incentives
and
practices
of a private sector, mutual, insurance
organisa-
tion. The main features of MIMIC are: fully
risk-based premiums, payments by the Federal
Deposit Insurance Corporation (FDIC) to the
US Treasury Department (the Treasury) for its
line of credit and `catastrophe
insurance',
rebates
to banks when the reserve
ratio exceeds a risk-
based ceiling, surcharges
on banks when the
reserve ratio dips below a risk-based
floor, dilu-
tion fees on deposit
growth to maintain reserve
ratio and refunds to banks to maintain reserve
ratio when their deposits
shrink.
INTRODUCTION: AN OPPORTUNE TIME
FOR REFORM
Policy reform often proceeds in the caul-
dron of crisis. In that cauldron, demand for
immediate action to alleviate the symptoms
of a flawed financial system often boils up
so rapidly and strongly that more funda-
mental flaws are not adequately addressed.
In addressing reform of deposit insurance
and other policies of the Federal Deposit
Insurance Corporation (FDIC) in the USA,
we need not, and should not wait for the-'
heat to be turned up. Rather, conditions
now allow reform to be pursued deliber-
ately and thoughtfully.
Former FDIC Chairperson Donna
Tanoue1'2 has said that, because
neither the
banking industry nor the FDIC is facing
any foreseeable crisis, now is an opportune
time for reforming deposit insurance. Just
as skilled banking management requires
that policies and operations be set with an
eye toward the future, skilled banking pol-
icymaking should be at least as forward
looking. Recognising that the financial seas
will not always be tranquil, policymakers
can ready their vessels now for the possibi-
lity of rougher seas
in the future.
Since the early 1990s, the financial health
of the US banking system as a whole and
that of the FDIC have rebounded. Earnings
in the banking industry have been high
and loan losses have been low. Bank capital
as measured by the standard ratios has been
replenished. As a consequence, losses
charged to the FDIC's deposit insurance
reserve funds have been low and the ratio
of deposit insurance fund reserves to
insured deposits has risen steadily.
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