Structuring Deposit Insurance for a United Europe

Anthony M. Santomero and Jeffrey J. Trester

European Financial Management, 1997, vol. 3, issue 2, 135-154

Abstract: This paper analyses the difficulties associated with imposing a unified deposit insurance scheme in a unified Europe. Specifically, it investigates the determinants of optimal deposit insurance in light of the Commission's 1994 decision requiring mandatory minimum coverage and encouraging a single unified deposit insurance structure. Issues of deposit insurance premiums and tax burden are analysed in the context of a general equilibrium‐type model. The results indicate that taxes, the optimal degree of deposit insurance, and societal risk aversion are all interrelated in such a structure. Therefore, a common insurance system may not be feasible nor appropriate for a first best solution; co‐ordination and even unified taxation may be necessary. At the minimum, exceedingly close macroeconomic policy co‐ordination will be necessary for the single market for financial services to come to fruition and achieve stability.

Date: 1997
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