Desperate Times, Desperate Measures.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
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 Much of the money was being withdrawn by institutional clients, including mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils.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.”
Desperate Times, Desperate Measures
It’s not hard to see why the European Commission is so worried about the prospect of bank runs triggering disorderly bank collapses in the Eurozone. What happened to Banco Popular could happen to any number of banks in any number of Eurozone countries, including Germany where some of the regional banks (landesbank) are hanging on by the skin of their teeth. And the risk of contagion in the Eurozone is higher than ever.
Many of the problems that plagued Europe’s banks during the last financial crisis have not been resolved despite the trillions of euros conjured up to save the system by the European Central Bank. Nowhere is this more apparent than in Italy, which over the last month has tidied up two failing banks in the Venice region and the even bigger Monte dei Paschi di Siena. The deals will cut large amounts of deadwood from the sector, and have lifted confidence in what remains of it.
However, as the IMF’s country report on Italy shows, while the sector’s biggest problem, its non-performing loans, may have shrunk “marginally” in recent months they are still equivalent to a staggering 21% of GDP. As for bad loans — those that will likely never be repaid and where repossessing the collateral, if any, is the only hope of any kind of recovery — they “remained high at about €203 billion in April 2017 despite bad loan sales of about €8 billion.”
While the recent banking interventions in Italy may have briefly boosted confidence in the sector, there are clearly still massive unresolved issues. As the collapse of Banco Popular showed, it doesn’t take much to push a teetering bank over the brink: consistent bad news and rumors, spliced with falsely soothing words and an occasional untimely dose of reality from regulators, can be enough. Once the momentum gets going, it’s virtually impossible to stop.
Now, the European Commission, the same entity that wants to impose increasingly draconian limits on the use of cash in Europe, believes it can prevent bank runs that are happening via electronic transfers, and that it can thus keep banks from collapsing. Threatening to freeze depositors’ accounts is surely going to inspire a lot of confidence in these teetering banks.By Don Quijones.
As part of its QE operations, the ECB pours billions of freshly created euros each month into the bonds of Europe’s biggest corporations and the European subsidiaries of non-European transnationals. But it’s ending up with more than just a few “fallen angels.” Read… The ECB Morphs into the Mother of All “Bad Banks”