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Deposit insurance in the European Union: in search of a third way

The paper addresses two of the main issues of contention in the debate of the establishment of a European System of Deposit Insurance, i.e. moral hazard andthe danger of a “transfer Union”. First, a theoretical model is built to show that both issues can be solved by envisaging market-based private sector mechanisms of compulsory insurance and re-insurance, accompanied by a regulatory framework to ensure a minimum standard of deposits protection across the EU ,and a public backstop at the EU level. Second, we review and compare the evolution of deposit insurance in the US and Italy in the last 150 years, highlighting how after an initial period in which private sector mechanisms prevailed, the systems later diverged in line with the diverging requirements of national consolidation. Both the model and the historical overview converge in pointingtowards a holistic approach linking deposit insurance to supervision and resolution, breaking the doom loop between banks and sovereigns, and searching for a third way between centralised and decentralised, public and private mechanisms.