Deposits guarantee schemes in the EU regulatory framework and moral hazard problem

Thumbnail Image
Journal Title
Journal ISSN
Volume Title
One of the most important pillars of economic stability is financial stability. Financial stability in general is linked to the banking sector, which is the backbone of the economy and finance in all countries. Therefore, any default or disruption to the financial sector will affect the economy and financial stability. The most important risk to the stability of the banking sector is the failure of banks. Therefore, countries resort to the necessary regulations to prevent the failure of banks or reduce its negative consequences. The most important of these regulations are deposit guarantee schemes. Deposit guarantee schemes minimize the impact of bank failures, most importantly the withdrawal of deposits by depositors. Deposit guarantee schemes provide protection to depositors in case banks fail and regulate compensation as soon as possible. But this protection and guarantee may lead to the problem of moral hazard. The problem of moral hazard arises because banks believe that deposits are guaranteed against loss. Deposit guarantee schemes always take the problem of moral hazard seriously and try as much as possible to mitigate its effects.. The EU has introduced guarantee deposits schemes at the domestic level. The most important is the unified coverage limit for all countries, which may reduce the efficiency of deposit guarantee schemes to counter the moral hazard.