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Common Deposit Insurance, Cross-Border Banks and Welfare

Author

Listed:
  • Lóránth, Gyöngyi
  • Segura, Anatoli
  • Zeng, Jing

Abstract

We study the effects of the introduction of a supranational authority responsible for common deposit insurance in a model of cross-border banks with both endogenous risk-taking and within-group risk-sharing possibilities. With national deposit insurance, local authorities inefficiently ring-fence resources flowing from healthy to impaired subsidiaries for high asset correlation. The anticipation of ring-fencing discourages cross-border bank integration. Common deposit insurance removes ring-fencing and encourages cross-border integration, but has an ambiguous impact on the banks' risk-taking incentives. Overall, common deposit insurance increases welfare when banks are sufficiently risky, but otherwise can lead to excessive cross-border integration and lower welfare.

Suggested Citation

  • Lóránth, Gyöngyi & Segura, Anatoli & Zeng, Jing, 2022. "Common Deposit Insurance, Cross-Border Banks and Welfare," CEPR Discussion Papers 16893, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16893
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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services

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