Deposit insurance, like any insurance scheme, raises moral hazard concerns. Such concerns arising from European deposit insurance can be alleviated through a country-specific component in the risk-based premium for deposit insurance and limits on sovereign bond exposures on bank balance sheets. This paper, which forms part of the Euro Area Reform debate, argues, however, that proposals to maintain national compartments in a new European Deposit Insurance Scheme are self-defeating, as such compartments can be destabilising in times of crisis.

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JEL Financial Aspects of Economic Integration (jel F36), International Policy Coordination and Transmission (jel F42), Banks; Other Depository Institutions; Mortgages (jel G21), Government Policy and Regulation (jel G28)
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Note Forthcoming in Journal of Financial Regulation
Schoenmaker, D. (2018). Building a Stable European Deposit Insurance Scheme. doi:10.2139/ssrn.3178261