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

Abstract

SUMMARY This 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.