Deposit rates in Croatian banks are at a similar or higher level, compared to deposit interest rates in EMU countries. The fact that depositors in Croatia earn more on average than depositors in other European countries indicates that banks in Croatia have not transferred the cost of deposit insurance to depositors, even though this cost is much higher in Croatia than in EMU countries. The banks have absorbed this cost, which is reflected in lower rates of return on capital. The cost of deposit insurance has no predominant effect on the overall cost of regulation and interest rates. However, main institutional features of the deposit insurance system have not changed during the last decade, nor have they been adjusted to modern challenges of high capital mobility. Main efforts of the deposit insurance reform should be directed towards the problem of the governance model, and towards widening the scope of financing instruments.