Deposit Over-Insurance in EU Accession Countries - A Moral Hazard Boomerang to the Euro Area?

Abstract

The paper presents the coverage levels and institutional features of deposit insurance in EU accession countries. A simple comparison in relative and nominal terms states that deposit insurance in 10 Central and Eastern European countries is considerably not only above the level of 'the good practice' but also above the euro area average. The characteristics of deposit insurance systems are studied as a part of the safety nets in these countries, which configuration is, on one hand, directly inherited from the legacy of the central-planned economy, modified in the transition process accompanied by deep structural changes and severe banking crises, and on the other hand, imposed by the EU accession requirements and harmonization process. In spite of the fact that there might be some historical and logical justification of the deposit over-insurance in accession countries, it could inevitably lead to increasing moral hazard, incentives distortion and increasing costs of banking intermediation in the whole enlarged euro area. Unfortunately, we have to point out that deposit insurance in accession countries is an example of the contradictions during the financial harmonization of the EU countries.