Editor’s note: This column is based on CEPR Discussion Paper No. 16893 “Common Deposit Insurance, Cross-Border Banks and Welfare”.

More than a decade after its creation, the banking union remains incomplete. Supervision has been centralised, and a common resolution framework has been created, but deposit insurance remains national. This incomplete allocation of responsibilities has been linked to the continued fragmentation of European banking, with few cross-border mergers and limited cross-border competition (Schnabel and Veron 2018, Beck et al. 2022). As Andrea Enria, then Chair of the ECB’s Supervisory Board, put it in 2023, “an incomplete banking union is the reason why cross-border banking groups are ring-fenced along national lines and cross-border integration does not happen” (Enria 2023). According to ECB estimates, national restrictions leave €225 billion of capital and €250 billion of liquidity trapped in local subsidiaries. These resources cannot necessarily be deployed where they are most needed, making cross-border groups less efficient and cross-border expansion less attractive (Financial Times 2026).

In June 2026, the European Commission was reported to be considering reforms that would give banking groups greater freedom to allocate resources across borders, while requiring parent banks to support subsidiaries when needed. The European Commission Executive Vice-President Teresa Ribera urged member states to support cross-border bank mergers and pointed to the absence of a common deposit-guarantee system as one of the obstacles to completing the banking union (Reuters 2026). A common European deposit insurance system would reduce the incentive to protect resources along national lines and allow cross-border banking groups to operate more like genuinely integrated firms.

Missing in this policy debate is a key moving part: How do banks change their risk-taking behaviour once resources can move freely within the group, and particularly in a crisis? Removing ring-fencing can affect bank risk-taking because it changes not only the allocation of resources after trouble occurs but also the consequences of getting into trouble in the first place. A subsidiary that expects support from and extends support to the rest of its group faces a different set of incentives from one that expects each unit to recapitalise itself.

In our research, we show that this link between risk-sharing and risk-taking fundamentally changes the welfare consequences of completing the banking union (Lóránth et al. 2026).

Why national authorities ring-fence

Consider a cross-border banking group with a healthy subsidiary in one country and an impaired subsidiary in another. From the group’s perspective, the natural response is to transfer resources from the healthy unit to the impaired one. Such support may prevent costly external recapitalisation and preserve the value of the group.

The national authority responsible for the healthy subsidiary sees a different problem. If resources leave the country and the subsidiary later fails, fewer resources remain to protect local depositors. A transfer may therefore reduce the expected losses of the banking group as a whole while increasing the losses borne by one national deposit insurance fund. This is the fundamental source of ring-fencing: When responsibility for losses is national, protecting resources nationally can be rational.

A common deposit insurance fund changes this calculation. It bears losses across the group and, therefore, internalises both sides of an intragroup transfer. If moving resources from one subsidiary to another reduces total expected losses, there is no reason to block the transfer merely because the costs and benefits fall in different countries.

Our analysis, therefore, supports an important part of the current policy consensus. Common deposit insurance can remove the underlying incentive to ring-fence resources and allow capital to move to where it is most valuable.

The effects begin before a crisis

The implications do not stop there.

If banks know that resources can be reallocated across subsidiaries in times of trouble, operating across borders becomes more valuable. A cross-border group has an internal capital market: a strong subsidiary can support a weak one, reducing the need to raise costly external capital. Ring-fencing reduces this benefit. A common deposit insurance system, therefore, does more than just improve the functioning of existing cross-border groups. By making internal risk-sharing more effective, it also makes cross-border banking more attractive and encourages greater integration.

This is the logic that underpins much of the current policy debate: complete the missing pillar of banking union, and cross-border integration will follow. But there is a missing step. Better insurance changes behaviour.

When an impaired subsidiary can expect support from a healthy subsidiary, becoming impaired is less costly for the group. The prospect of costly external recapitalisation provides discipline; intragroup support weakens it. Better risk-sharing can therefore reduce incentives to avoid risk.

There is, however, an opposing force. A healthy subsidiary becomes more valuable because it can rescue another part of the group. When decisions are made at the group level, keeping one subsidiary healthy creates value not only there, but elsewhere in the group. This can strengthen incentives to avoid risk.

The effect of removing ring-fencing on risk-taking is therefore ambiguous. It depends on whether eliminating ring-fencing increases or decreases the value of the deposit insurance put.

When the fundamental risk in the economy is relatively low – that is, when subsidiaries are more likely to remain healthy for reasons unrelated to their own risk-taking – a troubled subsidiary is likely to find another subsidiary healthy enough to support it. The prospect of such support weakens the discipline imposed by costly external recapitalisation. Removing ring-fencing can therefore increase risk-taking.

When the fundamental risk in the economy is high, a healthy subsidiary is particularly valuable because it can preserve the value of the rest of the group. The group therefore has more to gain from keeping each subsidiary healthy, and removing ring-fencing can strengthen incentives to reduce risk.

The relevant policy question is therefore not simply whether common deposit insurance improves risk-sharing. It does. The question is how the prospect of better risk-sharing changes risk-taking.

More integration is not a sufficient welfare test

This distinction matters for welfare. A common deposit insurance system can reduce ring-fencing, improve resource allocation within banking groups, and encourage cross-border integration. But banks can take advantage of the insurance provided by internal capital markets by taking excessive risk, as they do not fully internalise the consequences of their risk-taking for the deposit insurance system. As a result, a reform can make cross-border expansion privately attractive even when the associated increase in risk imposes costs on the safety net.

When better intragroup risk-sharing strengthens incentives to keep subsidiaries healthy, risk-sharing improves, risk-taking falls, and common deposit insurance raises welfare. When it weakens discipline, however, the gains from moving resources more efficiently in a crisis must be weighed against greater risk-taking before the crisis. In our analysis, the latter can outweigh the former: common deposit insurance can encourage more cross-border banking while reducing welfare.

This creates a possibility that is largely absent from the policy debate.

The policy implication is not to preserve national ring-fencing. But greater freedom to move capital and liquidity across borders should be accompanied by sufficiently strict supervision to address the risk-taking incentives created by expectations of future within-group support.

References

Beck, T, J-P Krahnen, P Martin, F C Mayer, J Pisani-Ferry, T Tröger, B Weder di Mauro, N Veron and J Zettelmeyer (2022), “Completing the Banking Union: Economic Requirements and Legal Conditions”, CEPR Policy Insight No. 119.

Enria, A (2023), “Exogenous shocks and endogenous challenges: five years of European banking supervision (and beyond)”, Speech at the London School of Economics, 30 October.

Financial Times (2026), “EU set to remove barriers to banks’ cross-border capital flows”, 19 June.

Lóránth, G, A Segura and J Zeng (2026), “Common Deposit Insurance, Cross-Border Banks and Welfare”, CEPR Discussion Paper No. 16893 (previous version circulated under the title “Voluntary Support and Ring-Fencing in Cross-border Banks”).

Reuters (2026), “Europe antitrust chief urges EU countries to back cross-border bank deals”, 17 June.

Schnabel, I and N Veron (2018), “Breaking the stalemate on European deposit insurance”, VoxEU.org, 7 April.