Abstract
This chapter explores the two major phases of the dynamics of deposit insurance (DI) systems. The first phase involves the implicit and full DI inherited from EU’s socialist past, while the second phase notes how the banking crises and EU harmonization have resulted in the explicit and high level of deposit insurance. It is suggested that the nominal harmonization of DI systems ignored the real condition of the economies and banking systems. This then resulted in great costs to the EU. The chapter briefly discusses the EU Directive on Deposit Guarantee Schemes of 1994 and argues that accession countries are overinsured. The reasons for this overinsurance are then analyzed and their relation to moral hazard is determined. Finally, the channels through which overinsurance can and have influenced the Euro Area’s financial system are explored.
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