Seminar

Common Deposit Insurance, Cross-Border banks and Welfare

Anatoli Segura (Bank of Italy)

March 22, 2024, 14:00–15:15

Toulouse

Room Auditorium 4

Finance Seminar

Abstract

We study the effects of the introduction of common deposit insurance across countries in a model of cross-border banks with both endogenous risk-taking and within group risk-sharing possibilities. With national deposit insurance, there is inefficient ring-fencing of resources from healthy to impaired subsidiaries for high asset correlation, which reduces cross-border bank integration. Common deposit insurance removes ring-fencing and encourages cross-border integration, but has an ambiguous impact on the banks’ risk-taking due to opposing franchise value and liquidation threat effects. Common deposit insurance is welfare increasing for risky enough banks, but otherwise leads to excessive cross-border integration and lower welfare.

JEL codes

  • D8: Information, Knowledge, and Uncertainty
  • G11: Portfolio Choice • Investment Decisions
  • G2: Financial Institutions and Services