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Completing the Banking Union with a European deposit insurance scheme: who is afraid of cross-subsidization?

Author

Listed:
  • Jacopo Carmassi
  • Sonja Dobkowitz
  • Johanne Evrard
  • Laura Parisi
  • André F Silva
  • Michael Wedow

Abstract

SUMMARYThis paper investigates the impact and appropriateness of establishing a fully mutualized European deposit insurance scheme (EDIS) using a unique supervisory micro-level data set on euro area banks’ covered deposits and their other liabilities. We find that an ex-ante funded deposit insurance fund (DIF) with a target size of 0.8% of euro area covered deposits would be sufficient to cover losses even in a severe banking crisis. We then derive risk-based contributions to the DIF based on the different bank- and country-specific factors, showing that they can take into account the relative riskiness of banks and banking systems to tackle moral hazard. We also find that smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Finally, we show that there would be no unwarranted systematic cross-subsidization within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF.

Suggested Citation

  • Jacopo Carmassi & Sonja Dobkowitz & Johanne Evrard & Laura Parisi & André F Silva & Michael Wedow, 2020. "Completing the Banking Union with a European deposit insurance scheme: who is afraid of cross-subsidization?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 35(101), pages 41-95.
    • Handle: RePEc:oup:ecpoli:v:35:y:2020:i:101:p:41-95.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiaa007
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    Cited by:

    1. Koetter, Michael & Nguyen, Huyen, 2023. "European banking in transformational times: Regulation, crises, and challenges," IWH Studies 7/2023, Halle Institute for Economic Research (IWH).
    2. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    3. Esa Jokivuolle & George Pennacchi, 2019. "Designing a Multinational Deposit Insurance System: Implications for the European Deposit Insurance Scheme," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 21-25, May.
    4. Maria Karadima & Helen Louri, 2020. "Bank competition and credit risk in the Euro area, 2005-2017: Is there evidence of convergence?," LEQS – LSE 'Europe in Question' Discussion Paper Series 155, European Institute, LSE.
    5. Francesco Spadafora, 2020. "Completing the Economic and Monetary Union: Wisdom Come Late?," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 6(3), pages 379-409, November.
    6. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005875 is not listed on IDEAS
    7. G. Arghyrou, Michael & Gadea, Maria-Dolores & Kontonikas, Alexandros, 2024. "Private bank deposits and macro/fiscal risk in the euro-area," Journal of International Money and Finance, Elsevier, vol. 140(C).
    8. Joop Adema & Christa Hainz & Carla Rhode, 2019. "Deposit Insurance: System Design and Implementation Across Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 42-51, May.
    9. Paolo Fegatelli, 2019. "Central bank digital currencies: The case of universal central bank reserves," BCL working papers 130, Central Bank of Luxembourg.
    10. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005878 is not listed on IDEAS
    11. Marius Clemens & Stefan Gebauer & Tobias König, 2020. "The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme," Discussion Papers of DIW Berlin 1873, DIW Berlin, German Institute for Economic Research.
    12. Philip R. Lane, 2019. "Macrofinancial Stability and the Euro," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 424-442, September.
    13. Francesco Spadafora, 2019. "European integration in the time of mistrust," Questioni di Economia e Finanza (Occasional Papers) 512, Bank of Italy, Economic Research and International Relations Area.
    14. Mario Tümmler, 2022. "Completing Banking Union? The Role of National Deposit Guarantee Schemes in Shifting Member States' Preferences on the European Deposit Insurance Scheme," Journal of Common Market Studies, Wiley Blackwell, vol. 60(6), pages 1556-1572, November.
    15. Parisi, Laura & Chalamandaris, Dimitrios & Amamou, Raschid & Torstensson, Pär & Baumann, Andreas, 2020. "Liquidity in resolution: estimating possible liquidity gaps for specific banks in resolution and in a systemic crisis," Occasional Paper Series 250, European Central Bank.
    16. Fernández-Aguado, Pilar Gómez & Martínez, Eduardo Trigo & Ruíz, Rafael Moreno & Ureña, Antonio Partal, 2022. "Evaluation of European Deposit Insurance Scheme funding based on risk analysis," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 234-247.
    17. Bonfim, Diana & Santos, João A.C., 2023. "The importance of deposit insurance credibility," Journal of Banking & Finance, Elsevier, vol. 154(C).
    18. Esther Gordo & Ivan Kataryniuk, 2019. "Towards a more resilient euro area," Economics and Business Letters, Oviedo University Press, vol. 8(2), pages 106-114.
    19. Herzberg, Valerie & McQuade, Peter, 2018. "International bank flows and bank business models since the crisis," Financial Stability Notes 5/FS/18, Central Bank of Ireland.
    20. Huertas, Thomas F., 2019. "Completing banking union," SAFE White Paper Series 63, Leibniz Institute for Financial Research SAFE.
    21. repec:ces:ifodic:v:17:y:2019:i:1:p:50000000005874 is not listed on IDEAS
    22. Angeloni, Ignazio (ed.), 2020. "Beyond the Pandemic: Reviving Europe’s Banking Union," Vox eBooks, Centre for Economic Policy Research, number p327, December.
    23. Philip R. Lane, 2021. "The Resilience of the Euro," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 3-22, Spring.
    24. Falko Fecht & Patrick Weber, 2019. "What We Can Learn from the Introduction of Blanket Deposit Guarantees in Germany 2008 about the Benefits of EDIS," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 26-29, May.
    25. Herzberg, Valerie & McQuade, Peter, 2018. "International bank flows and bank business models since the crisis," Financial Stability Notes 05-18, Central Bank of Ireland.

    More about this item

    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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