The European deposit insurance in perspective

The DI operates as a rent-sharing arrangement. This paper argues that such an arrangement can operate effectively only if the appropriate level of deposits is mobilized towards this end, and highlights the inevitable outcome: fierce competition for deposits amongst the Eurozone MSs. To deepen the argument data analysis is provided indicating the existence of regulatory subsidy in the form ofimplicit though effective DI, moral hazard and adverse selection. Against this background, the EU Commission promotes the creation of an EDIS as the third pillar of the BU. The EDIS proposal is considered by Economic institutions in strictly economic terms. Yet, the EP promotes a restrictive course supporting a liquidity providing EDIS. The paper argues that such an EDIS would render regulatory subsidy and rent-seeking behavior persisting, by allowing national policies to be pursued with considerable discretionary power and in the context of increasing competition for deposits. This would run contrary to the BU objectives and constitute a major failure of the programme.