Competition, resilience, and stability : implications for institutional protection schemes and systemic risk in the European Banking Union

The finalization of the European Banking Union (EBU) requires the completion of the third pillar, the system of depositor protection. However, whereas the two first pillars, while set-ting common standards, allow for elements of decentralization and institutional diversity, some authors claim that the third pillar is only established with a single and joint deposit guarantee scheme (DSG) for all countries in the Monetary Union. Limits to joint liability, or alternative concepts like the existing institutional protection schemes (IPS) in some member states, are seen as imperfections that can only be temporarily accepted for political reasons. According to this view, such elements of compromise and differentiation should be over-come. In our paper, we argue that neither the DGS nor the IPS is always efficient. Choosing an IPS is a response to a special way to organize banking business. It contains no element of regulato-ry arbitrage, as it represents a cost-efficient mean to protect depositors in decentralized banking networks marked by a larger number of regional banks and by a business model with a strong focus on long-term client relationships. Making decentralized banking and rela-tionship banking costlier through discriminating regulations (like the non-recognition of IPS) would thus have a negative impact on the common market, as it distorts the competition between different organizational concepts of banking.