The ECB proposes dropping the guarantee of bank deposits

21 nov. 2017 English Section
CĂLIN RECHEA (Translated by Cosmin Ghidoveanu)
The ECB proposes dropping the guarantee of bank deposits

The Council of the European Union and the European Parliament have sent to the ECB, in the beginning of this year, a request concerning the sending of some proposals to revise the framework for managing crises.

The beginning of this new legislative process dedicated to the crises raises numerous concerns, especially as all the European authorities are praising the economic performance of the Eurozone lately.

Is the current bank capital regulatory framework not enough? Not even after the approval of the Directive for the banking resolution and recovery, which has been transposed in the legislation of all the EU member countries?

Known particularly for the institutionalization of the bank bail-in procedure, namely the saving of banks by using the depositors' money, if a haircut proves insufficient to the other creditors of the financial institutions, the BRRD (Bank Recovery and Resolution Directive) has set a limit for the seizure of deposits, represented by the guarantee threshold of 100,000 Euros.

Given the proposals of the ECB to make additions to the Capital Requirements Directive of the financial institutions, the regulator of the Eurozone doesn't seem to have confidence in the effectiveness of its own printing press.

The path has been opened in summer this year by an initiative originating from the presidency of the Council of the European Union, currently owned by Estonia. "The granting of account freezing prerogatives to the supervisory institutions represents a feasible option", a document quoted by Reuters says, which includes measures to temporarily prevent withdrawals from banks at risk of collapse (author's note: see also the article "Mai credeţi că banii din bancă sunt ai dumneavoastră?", BURSA, 31.07.2017 "Do you still believe the money in the bank is yours?").

It seems that the temporary freezing of bank deposits is not enough for what the ECB expects will come along.

"A moratorium applied prior to the banking resolution needs to have a broad scope, in order to allow an adequate reaction to the liquidity withdrawals", the document sent to the Council of the European Union and the European Parliament states (author's note: the document is available at www.ecb.europa.eu/ecb/legal/pdf/en_con_2017_47_f_sign.pdf).

Moreover, "the general exemption of deposits guaranteed as part of the investor compensation schemes needs to be replaced with discretionary exemptions granted by the European authorities so that a certain flexibility exists".

In other words, the ECB recommends dropping the guarantee of bank deposits. The Banking Recovery and Resolution Directive, which came into effect less than two years ago, explicitly states that the guaranteed deposits may not be frozen and may not be subject to suspension of payments.

With the recommendation to drop the guarantee of bank deposits, the ECB has included the central banks and the Bank of International Settlements in the list of institutions whose accounts and transactions may not be frozen.

But we shouldn't be overly worried, because the ECB has proved "generous". "During the transition period, depositors will have access to an adequate quota of their guaranteed deposits to cover the cost of living within five days from submitting the request", the proposal of the ECB shows.

But who sets the cost of living and which is the "competent authority" that decides on the withdrawal of the funds?

The national institutions for the guarantee of bank deposits have been created precisely to stop or at least to temper massive bank deposit withdrawals.

The new proposal of the ECB directly undermines this institutional framework. "If the collapse of a bank looks imminent, a substantial number of guaranteed deposits may be subject to massive withdrawals, because customers want to ensure direct access to their own resources or no longer trust the guarantee scheme", the ECB document further states.

The true stake is presented thereafter: "Such a scenario is very likely especially in the case of major banks, where the volume of guaranteed deposits is extremely high and can lead to the erosion of the trust in the guarantee scheme".

In the opinion of the European Central Bank, "if the moratorium applied to deposits doesn't include the guaranteed ones as well, then that moratorium can alert the customers with guaranteed deposits that a bank is at imminent risk of collapse", and under these circumstances "the moratorium can prove counterproductive and can result in a deposit flight instead of preventing it".

Such proposals aren't just simple prudential measures of authorities that want to show that they have learned the lessons of the crisis, but instead they represent, particularly in the case of the European Central Bank, a tacit acknowledgment of the fact that the monetary policy has failed.

In this context, we can't overlook the bitter irony of a recent statement made by Mario Draghi. "The recovery process of the Eurozone is strong, but the ECB needs to keep open the monetary tap to support the increase in wages", the ECB president said, according to Reuters.

Does Mario Draghi not know that the nominal value of the salary doesn't matter, only its real purchasing power does? And besides, who benefits from the wage increase, if they are deposited in bank accounts, from where they can be seized by the authorities at any time?

Do you still believe that the money in the bank is yours and you will still have time to withdraw it before they are seized for noble purposes?

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