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Deposit Insurance Schemes and Bank Stability in Europe: How Much Does Design Matter?

Chiaramonte, Laura and Girardone, Claudia and Migliavacca, Milena and Poli, Federica (2019) 'Deposit Insurance Schemes and Bank Stability in Europe: How Much Does Design Matter?' European Journal of Finance. ISSN 1351-847X

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Abstract

Usinga detailed set of Deposit Insurance Schemes (DIS) features for 27 EU countries, we assess the impact of national deposit insurance features on bank stability and investigate the existence of non-linearities in the relationship between coverage and bank stability both in crisis and normal times. Our results suggest that more protective DIS do not necessarily lead to greater bank risk. However, during the crisis some features that generate moral hazard incentives can decrease bank stability. We find an inverse U-shaped relation with bank stability decreasing at high levels of coverage during the crisis period. However, our evidence also suggests that the introduction of temporary measures like blanket guarantees are crucial to avoid panic among depositors andrestore stability. Finally, our results seem to imply that the stabilizing effect of deposit insurance can be different along the economic cycle, so regulators should consider that to be able to achieve an optimal DIS that minimizes moral hazard incentives a ‘dynamic’ approach may be necessary.

Item Type: Article
Uncontrolled Keywords: Deposit Insurance; Bank Stability; European Banking; Financial Crisis
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 10 Apr 2019 11:22
Last Modified: 25 Apr 2019 14:15
URI: http://repository.essex.ac.uk/id/eprint/24428

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