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Deposit Insurance and Banks’ Deposit Rates: Evidence from the 2009 EU Policy Change

Matteo, Gatti and Tommaso Oliviero ()

No 419, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Deposit insurance is one of the main pillars of banking regulation meant to safeguard financial stability. In early 2009, the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of €103,291 in 1994. We evaluate the impact of the new directive on the banks’ average interest rate on customer deposits by comparing banks in the Eurozone countries to those in Italy, before and after the policy change. The comparability between the two groups of banks is improved by means of a propensity score matching. We find that the increase in the deposit insurance limit led to a significant decrease in the cost of funding per unit of customer deposit and that the effect is stronger for riskier banks, suggesting that the policy reduced the risk premium demanded by depositors.

Keywords: Deposit Insurance; Average Deposit Interest Rate; Cost of Deposit Funding (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 38
Date: 2019-09, Revised 2019-08-19
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-ias
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