The Effects of Deposit Insurance Coverage on Depositors' Behavior in the European Union

The global financial crisis of 2007-08 caused tremendous global financial problems. It did not take long before the financial turmoil reached Europe. The European Council acknowledged that adjustments in the deposit insurance schemes were necessary to prevent financial instability: the minimum deposit coverage for European countries was raised. The impact of this policy measure on the size of bank deposits in European countries is assessed in this paper. A higher level of bank deposits is assumed to be associated with a higher level of depositors’ confidence. A sample of eight European countries (four northern European countries and four southern European countries) are examined from 2004-2012 by means of fixed-effects least squares dummy variable estimations. The methodology accounts for yearly and intra-country variations. A positive significant relationship between the heights of minimum deposit coverage on the amount of bank deposits is found: a higher level of minimum coverage comes with higher depositors’ confidence. This confirms that the policy measures taken by the European Council in late-2008 had the desired effect: increasing depositors’ confidence and consequently maintaining financial stability. Increasing the minimum deposit coverage is an effective policy measure for increasing depositors’ confidence in turbulent times.