The Contemporary Deposit Insurance Through the Perspective of Bank Resolution and Moral Hazard

Abstract

The deposit protection limit was a key issue in October 2008, when member states started randomly raising its level, which created unequal conditions for banks of different countries. That gave rise to the need for a common fixed level of protection in the EU, but its value was not connected with the real deposit amounts and the ability to bear the potential cost of payments by the guarantee schemes. Such an inconsistence created problems, especially for countries like Bulgaria, where the average amount of the protected deposits is less than 20,000 euro. As a result, excessive costs were imposed on the guarantee schemes and respectively on governments. Furthermore, an increase in the moral hazard in this field was observed. It is argued that the deposit protection limit should be reduced and a new concept for deposits should be introduced. The contemporary deposit insurance is analyzed in the light of the existing financing problems, the increasing moral hazard, the new responsibility for bank resolution and regulators’ negligence to resolve these problems.