EU Considers Account Freezes to Prevent Runs at Failing Banks

By Graham Vanbergen: You’ll be reading much in the press soon about how well the economy of the European Union is doing as Britain sails into the unknown choppy economic waters during Brexit negotiations. So well in fact that the EU is considering how to defend its failing banks from collapse.

 

“Brighter skies over eurozone as growth and employment pick up” the Guardian reports, without staying too much about how dire unemployment really is, especially for millions under 25. Yes there’s growth but only from the depths of despair. It projects growth at 1.7% during 2017, without saying too much that this is lower than the previous year or that real inflation will kill whatever growth it brings.

Back in March this year, one British newspaper wrote “Analysts condemned the flawed economics of this reckless [EU] experiment” and said the ECB faces a rude awakening as states crumble under the burden of debt.”

The ECB uses a system called Target2 to assess levels of debt and the bank’s own data appears to show it is only a matter of time before the current system breaks.

Although there are a number of differing estimates as to what country owes what to whom, it appears that Italy, Greece, Spain, and Portugal between them have an eye-watering combined €600 billion in non-performing loans. Not just loans, but loans identified as not repayable.

Debt to GDP for these countries is: Italy 132%, Greece 182%, Spain 100%+ and Portugal 126%.

It is clear that the European banking system is woefully under-capitalised, hugely over-leveraged and propped up by QE from the European Central Bank only makes the point that the EU banking system is falling apart, insolvent even.

So what does the ECB propose to do about non-performing loans, bearing in mind that bailing out yet more banks is an existential threat to its own purpose in life.

Reuters reports that the “EU explores account freezes to prevent runs at failing banks.”

“European Union states are considering measures which would allow them to temporarily stop people withdrawing money from their accounts to prevent bank runs, an EU document reviewed by Reuters revealed.”

The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits at Banco Popular contributed to the collapse of the Spanish lender.

It also come amid a bitter wrangle among European countries over how to deal with troubled banks, roughly a decade after a financial crash that required the European Central Bank to print billions of euros, in fact over €1trillion, to prevent a prolonged economic slump.

That the EU has to consider such drastic measures as working out procedures to withhold depositors money in the first place, can only prove the point that the ECB is as broke as the failed banking system it supports.

After the Northern Rock and Bradford & Bingley failures, and then of course the massive RBS bail-out, legislation was sought to defend the taxpayers/government from further damage. This legislation has been more than difficult to implement due to the international nature of modern day banking.

It makes you wonder though if the non-stop scandals that RBS has been fined for (mis-selling, the ‘dash-for-cash scandal, allegations of asset-stripping small business customers, trading with the enemy, fraud, rigging, money laundering and theft) if the equally non-stop ‘glitches’ customers have in accessing their cash has anything to do with a potential bank-run. As the bank is hauled up in front of courts in various parts of the world and customers get more nervous as to their own money, it appears that every year since 2013, customers have had various problems extracting their own cash at times such as HERE in 2013, HERE in 2014, HERE in 2015, HERE in 2016 and HERE in 2017.

Either RBS is the stand alone gold-medal expert is reaching new highs for rubbish IT systems or maybe something else is going on. Just a thought.

In the meantime, it should be noted that all banks in the EU, Britain included, have in place a policy to bail-in customer deposit accounts in the event of a major bank failure. “The U.K. has also given consideration to the recapitalisation process in a scenario in which Systemically Important Financial Institution (SIFI) liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalisation of the firm“.

We reported back in 2015 that a rather secretive Joint paper issued by the US Federal Deposit Scheme and the Bank of England dated 10th December 2012 included the statement; “deposit schemes may have to contribute to the recapitalisation of a failed bank”. This was because the Bank of England had pointed out that: “The Banking Act (UK)  powers do not, however, provide a wholly effective solution to the failure of a large, complex, and international financial firm.” Therefore, it required “A bail-in tool that would enable the U.K. authorities to recapitalise an institution.”

All of the above is conjecture because the fortunes of banks is something of a moving target and government’s will respond differently depending on the incident, the event that triggers it, the need for a reaction and who happens to be in power at that time.

Not sure that your government would actually do such a thing as freeze your account or refuse withdrawals?

In 2013, Cyprus’ second largest bank stopped customers withdrawing more than 260 euros (£221) a day from cash machines, as MPs said they needed more time to reach a deal to save the country’s economy when its banking system nearly collapsed.

In the same year, Italy put limits on daily cash withdrawals of €300 and Greece €600. Then Portugal put restrictions on any transaction is cash over €1,000, then Spain on transactions of more than €2,500. All of these are permanently in place. They all happen to be in that same club-med group of banks that may fail at any moment. These restrictions are there in the first place to provide readiness and flexibility if a situation suddenly flares up.

 

 

 

 

 

 

 

 

 

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