Negotiating the Costs of Protecting Savers

The global financial crisis revealed the fragility of modern finance as governments around the world needed to rescue banks with recapitalizations and guarantees. Whereas governments have scaled back these emergency programs, another stability intervention has remained: Deposit guarantee schemes, which governments expanded during the crisis, have stayed at high levels. Their aim is to protect ordinary savers and dispel their fear of losing savings and keep them from lining up in front of banks to withdraw their money, i.e. to avoid what happened with Northern Rock. But because deposit insurance schemes are most often funded by banks, extending them puts – in principle – costs onto banks. The extent to which banks have to pay for depositor protection depends, however, on the level funding of these schemes and the possibility to recover shortfalls ex-post. In this paper, I argue that the extension of deposit guarantee schemes is driven by policymakers’ concerns for financial stability and electoral performance—regardless of the partisan color of the government. The salience of financial crises allows policymakers to initiate or enlarge protection for depositors against resistance from banks. But the effective distribution of costs emerges only in the implementation of the funding rules after the crisis and is subject to banks’ lobbying capacity.