The European Central Bank has unveiled a new set of banking plans that will allow failing banks to freeze their deposits in the event of an economic catastrophe to prevent further bank failures.
Called a “moratorium tool,” the freeze would be temporary and would affect all of a bank’s liabilities, including cash deposits, meaning people with bank accounts would not be able to access their own money until the freeze is lifted. The idea is to prevent a “bank run” if a financial institution is determined to be “failing or likely to fail.”
The move suggests Europe is anticipating some kind of economic calamity they haven’t yet made public. In 2008, the global recession and subsequent loss of both investors and depositors led to the failure of a number of large bank corporations. While most countries in the EU seem to support the plan, the Bank of England is adamantly opposed, saying the plan itself could lead to financial instability.
Currently, the ECB allows local banks to freeze derivatives and bonds for up to 48 hours after they fail. Extending the freeze to five days, however, could create a default spiral for guarantors of those investments, which is the BoE’s biggest concern.
So far this year, four banks have found themselves on the verge of collapse. In Italy, however, many banks are teetering just on the edge of disaster due to “toxic” levels of outstanding loans that most believe will never be paid off. The world’s oldest bank, Monte Dei Paschi di Siena in Italy, received a $6.4 billion EU bailout in February.
Full article: EU Plan Lets Banks Take Deposits in Crisis (TruNews)
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