How to design the European Deposit Insurance Scheme
Much of financial regulation has been focusing on adequately pricing risk taking by lenders. This column argues that a multinational deposit insurance system such as the proposed European Deposit Insurance Scheme has important advantages, but can also create conflicts among its member nations due to potential deposit insurance subsidies that differ across nations. The authors suggest alternative design features that could minimise these subsidies and make a multinational deposit insurance system more mutually agreeable.
There are two main benefits to a credible deposit insurance system, whether the system is national or multinational. One is that deposit insurance protects the savings of financially unsophisticated individuals and small businesses. The other major benefit relates to the short-term, demandable nature of deposits that makes them convenient for settling transactions but can also lead to a ‘bank run’. By removing the incentive for bank runs, deposit insurance can reduce the severity of financial crises and enhance financial and monetary stability.
Relative to a national system, a multinational deposit insurance system can have the added benefit of improving the credibility of deposit insurance.1Especially in a monetary union, a purely national deposit insurance scheme could be exposed to the ‘sovereign-bank doom loop’ whereby a decline in the creditworthiness of a nation’s banking system that increases the cost of resolving bank failures impairs the government’s creditworthiness. In turn, this decline in government creditworthiness causes a loss of confidence in deposit insurance that leads to bank runs and further bank losses.2 A multinational deposit insurance system can help break this loop by sharing the losses from insuring deposits among nations.
In our work, we focus on understanding the importance of fair market value-based pricing of a multinational deposit insurance system such as the European Deposit Insurance Scheme (EDIS). We argue that if banks are not charged a premium equal to the fair cost of the deposit insurance, then various moral hazard-related distortions arise. Moreover, subsidised rates may be a source of member nation conflicts that can lower the likelihood of acceptance of the common scheme (Jokivuolle and Pennacchi 2019).
Περισσότερα εδώ: voxeu.org
