Bank Deposit Insurance in the European Union

Abstract

This article studies bank deposit insurance in the European Union (EU) and its likely effect on the member countries’ banking industry. Deposit insurance is a relatively new phenomenon in the EU and has emerged because of the more competitive environment now prevailing in the banking industry. None of the existing deposit insurance schemes approximates the optimal solution of actuarially fair insurance premiums. Bank regulation and bank supervision have substituted for imperfect deposit insurance. Consequently, the relevant focus of the analysis becomes the overall regulatory level rather than deposit insurance in isolation. The home rule principle, embedded in the Second Banking Directive, creates incentives for countries to compete on regulations. This competition, however, has a floor provided by a spate of EU directives that set minimum standards, including the very recent directive on deposit insurance. Much remains to be done in the assignment of regulatory functions. The Maastricht treaty, in fact, is relatively silent about the role of EU institutions, such as the European Central Bank, in maintaining the stability of the EU banking industry.