A positive analysis of deposit insurance provision: Regulatory competition among European Union countries |
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Institution: | 1. University of Victoria, Canada;2. Commonwealth Bank of Australia, New York, United States |
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Abstract: | We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on deposit insurance levels, systemic risk and transaction costs. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels. |
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Keywords: | Banking Deposit insurance Regulatory competition European Union |
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