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A Positive Analysis of Deposit Insurance Provision: Regulatory Competition Among European Union Countries

  • Merwan Engineer

    (University of Victoria, Canada)

  • Paul Schure

    ()

    (University of Victoria, Canada)

  • Mark Gillis

    (Commonwealth Bank of Australia, Australia)

We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on both stability and deposit insurance levels. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 29_12.

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Date of creation: Jun 2012
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Handle: RePEc:rim:rimwps:29_12
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