Abstract
Deposit insurance is one of the main pillars of banking regulation meant to safeguard financial stability. In early 2009, the EU increased the minimum deposit insurance limit from 20,000 to 100,000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of 103,291 in 1994. We evaluate the impact of the new directive on the banks average interest rate on customer deposits by comparing banks in the Eurozone countries to those in Italy, before and after the policy change. The comparability between the two groups of banks is improved by means of a propensity score matching. We find that the increase in the deposit insurance limit led to a significant decrease in the cost of funding per unit of customer deposit and that the effect is stronger for riskier banks, suggesting that the policy reduced the risk premium demanded by depositors.
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