European Bank Deposit Insurance Could Cushion Impact of Corona-Induced Corporate Insolvencies

Version
2.0
Resource Type
Text : Journal article
Creator
  • Clemens, Marius
  • Gebauer, Stefan
  • König, Tobias
Collective Title
  • DIW Weekly Report
    10 (2020), 32/33, S. 325-333
Publication Date
2020
Publication Place
Berlin
Classification
  • JEL:
    • Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • International Policy Coordination and Transmission
    • Insurance; Insurance Companies
    • Financial Institutions and Services: Government Policy and Regulation
Free Keywords
Schema: DIW Berlin keywords
Banking union; deposit insurance; risk-sharing
Description
  • Abstract

    The European banking union has so far lacked its third pillar: a joint insurance fund for bank savings deposits. As the present study shows, this could be a major disadvantage in dealing with the economic impact of the corona pandemic. A scenario in which a wave of corporate insolvencies leads to loan and deposit losses reaching six percent over a year would over- whelm Germany’s national deposit insurance scheme. Even if the government were to step in and guarantee all deposits, a European deposit insurance scheme (EDIS) would be by far the better option. With EDIS in place, private consumption would fall by 20 percent less and lending by around ten percent less than if the government were to initiate a bailout, which would also significantly increase public debt. From a German perspective, a swift introduction of EDIS would greatly increase risk-sharing. However, it is important to develop an efficient EDIS funding mechanism in order to minimize the burden on banks. Precautions should also be taken to prevent banks from taking greater risks as a result of EDIS being implemented.
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Update Metadata: 2020-08-06 | Issue Number: 1 | Registration Date: 2020-08-06