Deposit insurance Let me move to an area that has received relatively scarce attention in relation to financial integration, which is the design of deposit insurance schemes. Although I look at it today primarily from an integration perspective, we should keep in mind that deposit insurance plays also an important role in crisis prevention and resolution. Deposit insurance serves two different but interrelated purposes. Its consumer protection purpose is to protect small and unsophisticated bank depositors against loosing a potentially important part of their wealth. Its financial stability purpose is to avoid bank depositor runs. While it is nowadays hardly challenged any more that deposit insurance is a necessary element of the regulatory set-up, there is also awareness that an ill-designed deposit insurance scheme can have important adverse effects. On the one hand, a too generous coverage – protecting also large sophisticated depositors – could reduce market discipline for banks and therefore create distortions in the allocation of risks, including potential incentives for excessive risk taking by banks. This, in turn, could contribute to instability and related costs. On the other hand, unclear arrangements or only partial coverage for retail depositors could open the way again for bank runs. In order to illustrate the relevance of deposit insurance schemes for financial integration, let me recall the definition of financial integration we are using for our work.
Jean-Claude Trichet: Financial integration in Europe and important financial sector issues Keynote speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Second Symposium of the ECB-CFS research network on “Capital Markets and Financial Integration in Europe”, Frankfurt am Main, 13 February 2008. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to address such a distinguished audience of researchers, market participants and policy makers here at the Second Symposium of the ECB-CFS research network on “Capital Markets and Financial Integration in Europe”. As you will probably all appreciate, we are living in challenging times right now. And many, although not all, of the main challenges relate to financial sectors. So, for my remarks today I have made a selection of important financial sector issues, some more structural and others more related to recent developments. My presentation is divided into two broad parts. In the first part, I would like to broadly address the importance of financial integration in Europe, review the current state of integration and tell you about our activities in this area. In the second part I would like to look at one specific part of the European regulatory set-up that has been less often discussed in the past in relation to financial integration, namely the structure of deposit insurance schemes. I will conclude by some remarks on the present very significant market corrections and financial turbulences that we experienced in the international financial system since the summer last year.