(LUXEMBOURG) - European finance ministers faced pressure on Tuesday to offer savers more state protection for their bank deposits as Europe struggles to restore dwindling confidence in the banking system.

In a first joint, concrete measure to restore this confidence, the ministers were considering ramping up the minimum level of bank deposit guarantees in Europe to as much as 100,000 euros (136,000).

"We must restore confidence at a European level to the banking system," said Irish Finance Minister Brian Lenihan as he arrived for the talks in Luxembourg, confirming that a 100,000-euro limit was "under examination."

In a joint declaration on Tuesday, EU nations pledged to protect the stability of the financial system with "liquidity support through central banks, action to deal with individual banks or enhanced depositor protection schemes."

A coordinated European response to the crisis has been slow in coming despite the leaders of Britain, France, Germany and Italy meeting over the weekend, with Berlin opposing a proposal to create a European-wide bank rescue fund.

In the absence of EU-wide action, a growing number of European countries have rushed to raise their minimum guarantee on bank deposits in hope of boosting confidence.

Currently EU law requires member states to guarantee savers' deposits to at least 20,000 euros in case a bank goes bust, although some states have long offered much higher protection.

After Germany offered a blanket guarantee on bank deposits on Sunday, Austria, Britain, Denmark, France, Portugal, Spain and Sweden indicated they had similar plans in the works.

Ireland triggered the rush last week with a law offering an unlimited guarantee on all deposits at its biggest banks.

However, Ireland has come under fire from its EU partners for the move because it covers not only individual savers' deposits but a wide range of liabilities held by the country's six biggest banks.

The scope of the blanket guarantee has irritated other EU countries, which fear that it will give Irish banks an unfair advantage over their European rivals.

It also raised concerns that it could encourage people to flock to Ireland to park cash in Irish accounts, causing deposits to flow out of banks elsewhere in Europe.

"One country's solution is the other country's problem. We really have to push for a common solution," said Swedish Finance Minister Anders Borg.

In a meeting with Lenihan on Monday, EU Competition Commissioner Neelie Kroes asked Ireland to take measures over "distortions in financial flows."

However, economists warned that raising deposit guarantees would only have a limited benefits, although it could boost individuals' confidence.

Meanwhile, economists at investment bank UBS raised doubts over such ambtious guarantee schemes.

"The guarantee is not credible per se: if a run on bank was to happen the governments would not be able to fully guarantee the deposits," they said in a research note.

"The guarantee will be efficient only to the extent that it is self-fulfilling: because there is a state guarantee, there is no reason for a run on bank, hence the state guarantee is not needed/used," they added.

Likewise, analyst Nicolas Veron at Brussels-based economics think-tank Bruegel warned that raising deposit guarantees would only have limited benefits.

"Importantly, deposit insurance is good headline material because it relates to ordinary people's experience, but it's a bit of a sideshow from a capital markets point of view," he said.

"Don't expect decisions on deposit insurance alone to fix the current credit crisis," he said.

Economic and Financial Affairs Council (ECOFIN)

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