Deposit Insurance and Banks' Deposit Rates: Evidence from an EU policy

In early 2009 the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account. Italy was the only country with a limit already set to €103,291 from 1994. To evaluate the impact of the new directive we run a diff-in-diff analysis and compare the bank-size weighted average deposit interest rates of the Eurozone countries with the Italian ones. We find that the increase of deposit insurance leads to a decrease of deposit rates in European countries relative to Italy between 0.3 and 0.7 percentage points. The drop in deposit rates is confirmed by a diff-in-diff analysis run at bank level after implementing a propensity score matching of Italian banks with European ones. We finally show that this effect mainly come from riskier banks confirming that deposit insurance negatively affects deposit rates by reducing the depositors’ required risk-premium.