is quietly taking shape. But critics who think the market should play a role in setting premiums are calling the approach "primitive." Few observers dispute the need to tweak the Federal Deposit Insurance Corp.'s system for assessing premiums. That only 631 of the nation's 10,739 banks and thrifts pay for insurance despite reports of an economic slowdown and weakened underwriting standards is troubling, even to many bankers. But there is no consensus on the cure. The FDIC is focusing on well-capitalized institutions that have overall supervisory ratings of 1 or 2-the two best grades-but management or asset quality ratings of 3, 4, or 5, the worst. Virtually all of the 573 banks and thrifts that matched these criteria last year paid no premiums, but the agency believes some probably should have. To catch these outliers, the FDIC would consult examiners and exam reports, off-site surveillance models, and call-report data such as growth rates and asset concentrations. The agency does not know yet whether the screening system will work. To find out, its analysts are studying the long-term performance of banks that matched the ratings criteria approximately 10 years ago. But big-picture types like Columbia University professor Charles W. Calomiris, ISD/Shaw president Karen Shaw Petrou, and consultant Bert Ely say that though the FDIC's plan might be an improvement, it misses the boat. The FDIC should, they argue, take advantage of the market's expertise in assessing risk. The agency could require banks and thrifts to issue subordinated debt and then watch how the market prices it. The higher the price, the more the bank would have to pay for deposit insurance. "The markets know how to price these things," said Mr. Calomiris. "We know how to use models and track records of the firms to figure out what their default risks are ... and yet the FDIC is still playing this very primitive game." Arthur J. Murton, head of the FDIC's insurance division, defended the agency's plan as the best way to adjust premiums in the short term. Using the market to help set premiums has "appeal," he said, and the FDIC is studying it "pretty seriously." But major changes to the way the FDIC sets premiums would take legislation or a time-consuming rule-making, he explained. In the meantime, Mr. Murton expects to make a formal proposal to the FDIC board within a month or so. If approved, higher premiums could be assessed as early as May.

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