The European deposit insurance game plan

In: Journal of financial economic policy, Volume 11, Issue 1, p. 2-20

Abstract

Purpose
This paper aims to analyze the development of European Deposit Insurance (DI) and assess the recent development at the EU level to establish a European Deposit Insurance Scheme (EDIS) in the context of a more integrated financial framework: the Banking Union (BU).


Design/methodology/approach
The author uses literature review and empirical evidence to analyze the dynamic interaction among European governments in an effort to attract aggressive deposits with severe repercussion for financial stability.


Findings
The paper argues that a liquidity providing EDIS would render regulatory subsidy and rent-seeking behavior persisting by allowing national policies to be pursued with considerable discretionary power and in the context of increasing competition for deposits. This would run contrary to the BU objectives and constitute a major failure of the program.


Practical implications
The findings of the study can be helpful in understanding the DI policies pursued by European governments and their implications.


Originality/value
To the best of the authors' knowledge, this is the first study that examines the interactions among European governments in pursuing DI policies and assesses the implications of EDIS.