European Union Proposes Account Freezes to Protect Failing Banks

EU member nations are considering adopting measures that would allow states to protect against runs in failing banks by preventing people from accessing account deposits for up to 20 days. Reuters has revealed the proposal after receiving a leaked “EU document”.

Also Read: European Commission Launches Digital Currency and Dark Web Consortium

The Proposed Account Freezes Extend the Ability for States to Suspend Account Withdrawals

It has been revealed that EU states are considering implementing measures that would allow states to temporarily prevent citizens from making withdrawals from the accounts of failing banks. The proposals have been drafted since the start of 2017, and are designed to prevent bank runs and crises within the financial sector.

The proposed account freezes extend the ability for states to suspend account withdrawals – which currently exempt insured deposit accounts that hold less than 100,000 euros. The plan would allow the suspension of payouts for five working days, with a possible extension of 20 days allocated for “exceptional circumstances”. Existing EU legislation allows for states to initiate a two-day suspension of certain payouts in the event of potential bank failure – with deposits explicitly excluded.

The Proposals Have Received Criticism From Some European Financial Institutions

The European Union is no stranger to bank runs, with Spanish bank, Banco Popular, failing in recent months – the collapse of which was intensified by a sudden run on deposits. Another example is the 2013 Cyprus banking crisis, which saw much of the country’s population rush to convert their savings into alternative stores of value. This was in response to announcements that EU backed austerity measures allowing the seizure of citizens deposits to bail out failing banks had been passed. The events garnered great attention for bitcoin as a potential flight asset, with many attributing the April 2013 bitcoin bubble to Cypriot money suddenly flooding the bitcoin markets.

The proposals have received criticism from some European financial institutions, who have suggested that the proposed measures may exacerbate the risk of citizens withdrawing their funds in periods of financial uncertainty. Charlie Bannister of the Association for Financial Markets in Europe told media “We strongly believe that this would incentivize depositors to run from a bank at an early stage.”

Do you think that the proposed legislation could intensify the risk of bank runs by making citizens more likely to withdraw deposits during periods of financial uncertainty? Share your thoughts in the comments section below!

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