Common Deposit Insurance, Cross-Border Banks and Welfare

Lóránth, Gyöngyi, Anatoli Segura and Jing Zeng

No 16893, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the effects of the introduction of a supranational authority responsible for common deposit insurance in a model of cross-border banks with both endogenous risk-taking and within-group risk-sharing possibilities. With national deposit insurance, local authorities inefficiently ring-fence resources flowing from healthy to impaired subsidiaries for high asset correlation. The anticipation of ring-fencing discourages cross-border bank integration. Common deposit insurance removes ring-fencing and encourages cross-border integration, but has an ambiguous impact on the banks' risk-taking incentives. Overall, common deposit insurance increases welfare when banks are sufficiently risky, but otherwise can lead to excessive cross-border integration and lower welfare.

JEL-codes: D8 G11 G2 (search for similar items in EconPapers)
Date: 2022-01
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