Deposit_Insurance_During_EU_Accession (1).pdf

This because it is not likely that the higher level

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expenses they bear. This because it is not likely that the higher level of DI in accession countries will attract deposits form the EU countries (this way enjoying economy of scale in raising funds). The overinsurance of deposits in the accession countries (combined with the higher capital adequacy requirements) would cause higher costs for banking intermediation not only in AC but also in the euro area as a whole. The more expensive banking intermediation would reflect on the efficiency of the entire European banking system. 13 About the relation between DI and systemic risk see Llewellyn (2001). On one hand, deposit guarantee protects against bank panic (in the model of Diamond and Dybvig) i.e. systemic risk
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16 Conclusion The close study of the DI systems in the AC shows that those countries are really overinsured from a purely quantitative point of view as well as from the perspective of the European banks presence in these countries and the strength of the banking regulation. This inevitably leads to increasing moral hazard, competition distortion and to higher costs not only those countries but in the whole euro area. Having in mind the functioning of the UE (the distribution process), the old and rich members will incur much more expenses. Hence, meeting mechanically the requirements for nominal harmonization 14 , which are not in compliance with the real development of the AC, could have an adverse result - increasing probability of financial crisis and decreasing efficiency of the European banking system. The problems that will be encountered by the common fiscal and monetary policies will not be minor and could not be discarded (we do not describe them here). A possible solution (despite the advancing harmonization process), would be the linkage of DI coverage with GDP dynamics and with some indicators of the banking system of AC. Such reconsideration of the DI convergence process would benefit not only the accession countries but also the EU as a whole. References Berlemann, M. and N. Nenovsky, (2003) Lending of First Versus Lending of Last Resort: The Bulgarian Financial Crisis of 1996/1997, Comparative Economic Studies , (forthcoming). Benston, G. and G. Kaufmann (1996), "The Appropriate Role of Bank Regulation", Economic Journal, Issue 106, May, p. 688 - 697. Berglof, E. and P. Bolton (2002), The Great Divide and Beyond: Financial Architecture in Transition, Journal of Economic Perspectives, Vo. 16, No. 1 - Winter, p. 77 - 100. decreases, while on the other hand, it triggers moral hazard thus increasing the systemic risk. 14 Referring to the harmonization of the deposit insurance in the EU see Garcia and Prast (2002), Huizinga and Nicodeme (2002), Gropp and Vesala (2001).
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17 Bonin, J. and P. Wachtel, (2002) “Financial sector development in transition economies: Lessons from the first decade”, Bank of Finland, BOFIT Discussion Papers No 9.
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  • Spring '10
  • MEEDEN,G
  • European Union, Bank run, William Davidson Institute Working Paper

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