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

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 e20, 000 to e100, 000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of e103, 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.

A Regulatory Perspective on the Actual Challenges for the European Deposit Insurance Scheme

“…When the multilateral regulation has the tendency to be postponed, the unilateral action is in place (Tofan 2021). We can notice in this respect the fact that the limit was already increased in Italy (starting with 1994), and the average deposit rates decreased substantially among banks in the EU relative to banks in Italy (Gattia and Oliviero 2021). It is our opinion that the narrative of debate supports the harmonization of the regulation regarding the limits of the deposit insurance, one of the primary phases to build up a unique framework for the European deposit insurance scheme and to sustain the mechanisms of the EU banking union (Garonna et al 2021).…”

Deposit Insurance and Depositor Behavior: Evidence from Colombia

“…They show that this generated a large decline in uninsured deposits compared to insured deposits and verify that the intensity of this run correlates with banks' systemic importance. Gatti and Oliviero (2019) show that deposit insurance lowered deposit rates in the European Union following the increase of the insurance threshold to 100,000 Euros in 2009. Albertazzi et al (2020) find evidence that insured depositors take into account bank riskiness when making financial decisions and Slutzky and Chavaz (2020) show that depositors react to adverse shocks even if they lie below the insurance coverage limit.…”