Leaked: EU Plans to Freeze Deposits to Prevent Bank Runs, by Don Quijones

What could go wrong? From Don Quijones at wolfstreet.com:

Desperate Times, Desperate Measures.

Following a spate of drastic banking interventions in Spain and Italy earlier this summer, the European Commission is preparing new legislation to prevent bank runs from completely wiping out Europe’s hordes of zombified lenders. According to an Estonian document seen by Reuters, that legislation would include measures allowing EU governments to temporarily stop people withdrawing money from their accounts, including by electronic fund transfers.

The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits pushed Banco Popular over the brink in Spain. In its final days, Popular was bleeding deposits at a rate of €2 billion a day on average. Much of the money was being withdrawn by institutional clients, including mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils.

The European Commission, with the support of a number of national governments, is determined that what happened to Popular does not happen to other banks. “The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge,” a source close to the German government said.

Not everyone supports the new regulatory push. Some national governments and lenders fear the legislation will have the opposite of the desired effect, hastening frantic withdrawals at the slightest rumor of a bank being in trouble. “We strongly believe that this would incentivize depositors to run from a bank at an early stage,” said Charlie Bannister of the Association for Financial Markets in Europe (AFME).

Until now legislative proposals by the European Commission aimed at strengthening supervisors’ powers to suspend withdrawals had excluded from the moratorium insured depositors (those below €100,000 euros). If the new proposal is passed, pay-outs to insured depositors could be suspended for five working days. The freeze could even be extended to a maximum of 20 days in “exceptional circumstances.”

To continue reading: Leaked: EU Plans to Freeze Deposits to Prevent Bank Runs

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