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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 organisation. 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, dilution fees on deposit growth to maintain reserve ratio and refunds to banks to maintain reserve ratio when their deposits shrink.

Deregulation and other factors permit and encourage financial institutions to become more integrated, both within their own (financial) industries, such as banking and insurance, and across these industries. Financial regulators have responded with like integration. As financial institutions increasingly compete with firms from other industries and areas, financial regulators similarly compete more across borders. The resulting competition in financial regulation enhances innovation, choice, and efficiency. The advent of home-run regulation, which in general allows financial institutions to adhere only to the financial regulations of their home area and is spreading across the US and Europe, may allow numerous regulatory regimes within a given market.

The bank mergers of the 1990s often triggered upward adjustments in reported depreciation and goodwill amortization expenses, apart from any change in actual costs, due to the conventions of purchase accounting. Thus, conventional measurements underestimated the sizeable and long-lasting reductions in non-interest costs achieved following mergers.The largest reductions in reported post-merger bank costs occurred in labor expenses, which were not subject to accounting revaluations. Reported premises expenses jell considerably less than that of labor when buildings were revalued. Other non-interest expenses rose, partly because amortization increased due to the additional goodwill generated by mergers.

In recessions, depository institutions accounted for most declines in mortgage flows. Recently, they partially offset their withdrawals from primary markets with accumulations of mortgage-backed securities. Increases in direct flows into agency and private pools also countered the declining flows elsewhere. As the less-procyclical secondary mortgage markets grew and matured, they increasingly stabilized mortgage flows. During periods of international financial crises or of domestic economic stress, GSEs may have been particularly effective in stabilizing mortgage markets and moderating business cycles.

In an earlier paper published in this journal, Michael Bond and Gerald Smolen (1986) set out to test for the presence of the Darby‐Feldstein effect. They regressed the nominal rate of taxable long‐term securities on the nominal yield of long‐term tax exempt municipal securities. They conclude that the parameter for the explanatory variable, which is significantly greater than one, serves as proof of the Darby‐Feldstein effect. In addition, the authors maintain that this approach yields the prospects of an inverted Fisher condition irrelevant.