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Discussions are now underway to establish a system of joint deposit insurance for eurozone banks. Proponents of the scheme, with the European Commission and the European Central Bank taking the lead, point out that deposit insurance would avert the danger of a run on banks in times of crisis.While this is true, critics emphasize the disparity in risks, owing to the high share of bad loans on the balance sheets of banks in some countries.While the share of bad loans for banks in the stable eurozone countries is just 2 percent, the most recently published International Monetary Fund statistics, from last April, show a share of 11 percent for Ireland, 16 percent for Italy, 40 percent for Cyprus, and 46 percent for Greece.First and foremost, deposit insurance would induce irresponsible risk-taking on the part of banks.Some argue this danger no longer exists, because the ECB is now supervising European banks.It only means that an expansive European deposit-insurance scheme should not be established even after the bad loans now on banks' books are cleaned up.
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