Deposit insurance in the EU: Repetitive failures and lessons from across the Atlantic

Abstract

This article outlines weaknesses in the EU deposit insurance legal framework and proposes necessary amendments in its substantive rules to enhance the system’s ability to ensure financial stability by preventing bank runs. It first examines the overall relationship between systemic liquidity risk and bank runs, the relevant systemic events and transmission channels, stressing the information asymmetry phenomenon, and claiming that it is valid for all depositors. The article presents the main elements of the safety net against systemic liquidity risk and highlights the crucial role of deposit insurance. It also provides a practical example of several bank runs on both sides of the Atlantic, illustrating that the EU rules are less apt to prevent them. A comparison is drawn between the current EU and US legal frameworks of deposit insurance. That analysis, together with the practical case studies, elucidates the shortcomings of the EU legislation with respect to coverage, payout periods and funding mechanisms. Key amendments, related to wider overall deposit coverage, faster payout periods, and higher deposit insurance fund ratio backed with a governmental guarantee, are proposed.