Deposit_Insurance_During_EU_Accession (1).pdf

The high level of di is to some extent a continuation

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The high level of DI is to some extent a continuation of the full deposit guarantee during the socialist times (a kind of path dependence ), when the banking system was state-owned, saving deposits were limited and centralized in saving banks of the each country. In spite of the banking shake-up in the 90s, economic agents still believe that they can rely on the implicit assistance of the state in case of a crisis, and as a whole they are willing to take a higher risk against relatively lower returns (comparing to the behavior of the economic agents in the euro area). This is true not 10 EC (2001) Report on the operation of the "topping-up" provision of the Directive on Deposit Guarantee Schemes says that the general argument for keeping topping up provision (either host- or home-country) in the years to come is that it might be especially important during the enlargement process of the EU. 11 Undoubtedly there would be certain macroeconomic consequences on the level of the common monetary policy conducted by ECB, and on the fiscal policy synchronization process since while the monetary policy is centralized, the banking supervision stays on a national level. 12 Theoretical foundations of moral hazard development under banking regulation are discussed by Freixas and Rochet (1999); see. also Calomiris (1999).
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15 only for the depositors who place their money with more unstable banks against higher interest rates, and for the banks as well, that would put their money on risky and potentially failing investments. And most empirical studies (with some exceptions) find a positive relationship between the level of DI and the probability of bank crisis outbreak (Demirguc-Kunt and Detragiache (1998)). The increase of bank crisis probability in accession countries, ceteris paribus , combined with the high presence of big European banks, could be potentially translated into an increased probability of crisis in the whole European banking system. Here we have also to mention the fact that exchange rate regimes in AC are more inclined to fixed one (ERM II or the Currency boards), and considering higher share of foreign deposits (known as a “liability dolarization”) (see. Table 4), a hypothetical bank crisis would incur considerably higher costs (remember the 2001 crisis in Argentina). As a whole, in the case of potential problems, the costs of overcoming the crisis would be asymmetric – the richer countries in the EU would endure much more expenses coming than the poorer new members. Second, there is a close link between the increased moral hazard and the problems of oppressing and deforming the incentives in the banking system and the diminishing competition efficiency of EU banking system. One of the purposes of the nominal harmonization of the European legislation in the filed of DI is to avoid competition among national banking systems via DI. In fact, in the presence of different real deposit coverage (as a ratio to the GDP per capita), the banks in the accession countries are “punished” in terms of the higher expenses they bear. This because it is not likely that the higher level of DI in
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  • Spring '10
  • MEEDEN,G
  • European Union, Bank run, William Davidson Institute Working Paper

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