Deposit insurance has the potential to preserve and even restore financial stability in times of crises. This column uses evidence from more than 300,000 Belgian depositors of a large European bank during 2008 and 2009 to examine whether increasing deposit insurance coverage supported financial stability during the global financial crisis. It finds that the increase in deposit insurance coverage together with the nationalisation of a bank at the height of the financial crisis in the autumn of 2008 was effective in calming depositors. The effect of increased deposit insurance kicks in most strongly once the bank is reprivatised, and close bank-customer relationships and trust in the government reinforce the effect.
Financial regulation and banking
What is behind the pinballing price movements of Bitcoin? Neil Gandal tells Tim Phillips how supply and demand works for cryptocurrencies.
You can download Neil's paper, The Microeconomics of Cryptocurrencies (Neil Gandal, Joshua Gans, Guillaume Haeringer, Hanna Halaburda), free here
Authorities around the world have implemented a wide array of support measures to mitigate the impact of the COVID-19 crisis on the financial sector. This column introduces a new global database that tracks these measures. It finds that banking sector measures constitute the majority of policies taken and that they aim to take advantage of the flexibility embedded in the international standards. However, emerging market and developing economies tend to rely more on prudential measures that go beyond this embedded flexibility compared to advanced economies which may reduce bank balance sheet transparency and increase risks to financial stability. Financial authorities in richer and more populous countries appear to have taken more actions and were more responsive.
Without completion of the Banking Union, Europe’s Economic and Monetary Union will continue to be fragile and exposed to a return of the doom loop. This column provides a politically and economically viable solution based on first, creating a model ‘Safe Portfolio’ and, through a reform of the regulatory treatment of sovereign exposures, incentivising banks to move towards it; and second, reforming the resolution framework to empower the Single Resolution Board while simultaneously setting up, within it, a European deposit insurance based on the emerging consensus around a ‘hybrid model’.
The COVID-19 shock is unprecedented in terms of the scale and speed of its effects. This column provides an overview of financial fragmentation in the euro area during the crisis through the lens of a novel high-frequency composite indicator. It reveals that after an initial sharp deterioration, euro area financial integration broadly recovered to pre-crisis levels by mid-September, thanks to unprecedented fiscal, monetary and prudential policy responses.
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Bartsch, Bénassy-Quéré, Corsetti, Debrun, 15 December 2020
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