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Structuring Deposit Insurance for a United Europe

Authors

  • Anthony M. Santomero,

    1. Department of Finance and Wharton Financial Institutions Center, The Wharton School, University of Pennsylvaniaemail: santo@finance.wharton.upenn.edu and jjt@well.com
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  • Jeffrey J. Trester

    1. Department of Finance and Wharton Financial Institutions Center, The Wharton School, University of Pennsylvaniaemail: santo@finance.wharton.upenn.edu and jjt@well.com
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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.

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