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Evaluation of European Deposit Insurance Scheme funding based on risk analysis

Author

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  • Fernández-Aguado, Pilar Gómez
  • Martínez, Eduardo Trigo
  • Ruíz, Rafael Moreno
  • Ureña, Antonio Partal

Abstract

We carry out a quantitative analysis of the financing measures proposed for the European Deposit Insurance Scheme (EDIS) regarding the target level of the fund and the contribution scheme of member entities. We estimate the loss distribution of the EDIS considering different sources of systemic risk associated with the correlations between bank assets and we analyse the sensitivity of the results to bank portfolio risk. Our findings show how the interconnection between banks of different countries has an important influence on accumulated losses in the tail of the distribution. Likewise deterioration in the quality of bank portfolios produces a significant reduction in the fund's loss-absorbing capacity, which calls into question its soundness in times of economic recession. Finally, the contribution scheme provides more equitable risk measures and may be an appropriate incentive to reduce moral hazard in the Banking Union.

Suggested Citation

  • Fernández-Aguado, Pilar Gómez & Martínez, Eduardo Trigo & Ruíz, Rafael Moreno & Ureña, Antonio Partal, 2022. "Evaluation of European Deposit Insurance Scheme funding based on risk analysis," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 234-247.
    • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:234-247
    DOI: 10.1016/j.iref.2021.11.013
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    More about this item

    Keywords

    Bank risk; Systemic risk; Deposit insurance; Banking union;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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