Don Quijones: ECB Tightens Noose Around Bank Accounts

By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

The European Central Bank (ECB), arguably the European Union’s most powerful and least accountable institution, apparently needs more power, according to Daniele Nouy, the ECB’s top supervisor. Chief among the fresh powers it seeks is the power to temporarily prevent people from withdrawing their money from their accounts at banks that are in distress, including by electronic fund transfers.

“In my view… the introduction of adequate moratorium power for authorities is needed in order to react with the needed flexibility, if the situation of a bank deteriorates rapidly,” Nouy told a member of the European Parliament in a letter. “Given the potentially swift evolution of liquidity crises, a moratorium tool could be necessary to ensure there is adequate time for ensuring a credible solution,” Nouy said, adding that the ECB will soon publish an opinion on this issue.

The recent collapse and resolution of Spain’s Banco Popular and Italy’s Monte dei Paschi di Siena lent more impetus to this new regulatory push that has been quietly in the works for a while.

Late last year, the European Commission, the same entity that wants to impose increasingly draconian limits on the use of cash in Europe, proposed giving banking supervisors the authority to suspend some deposit withdrawals and payments obligations in exceptional circumstances.

But that was not enough to placate Europe’s senior ranks of central bankers. While the Commission proposal would exclude deposits under 100,000 euros, which to all intents and purposes are insured by their respective national governments, the Single Resolution Board has warned that significant amounts of cash could still leave the bank if the moratorium was “excessively narrow.”

As such, if the new proposal is passed — and given that its passage will involve very little in the way of democratic process, that’s more or less guaranteed — pay-outs to insured depositors could be suspended for five working days, according to an Estonian document recently seen by Reuters. The freeze could even be extended to a maximum of 20 days in “exceptional circumstances.”

All this furtive planning and plotting is happening against a backdrop of supposedly improving economic performance in the EU. On Friday the man in charge of the ECB, Mario Draghi, crowed that the global recovery is “firming up,” with the Eurozone apparently leading the way, while stressing the need, of course, for continued “significant monetary policy.”

As Draghi well knows, if the ECB’s lavish monetary policy was scaled back or, God forbid, withdrawn, its main beneficiaries, including some of Europe’s biggest corporations and, of course, Draghi’s home country of Italy, would not be able to afford the higher interest rates that would result from reduced bond purchases. Higher rates would effectively bankrupt the country. In that respect, Italians see Draghi as their guardian angel at the ECB.

Since the ECB bent its own rules on bank resolution out of all recognition earlier this summer to enable Italy’s government to bailout Monte dei Paschi with taxpayer funds as well as insulate bondholders of all stripes from the financial fallout of the wind-down of the two Veneto-based banks, Banca Popolare di Vicenza and Veneto Banca, Italy’s banking sector is apparently on the mend — at least according to the country’s banking elite, which converged this week on the shores of Lake Como for the annual Ambrosetti Forum.

In the words of Jean Pierre Mustier, chief executive officer of UniCredit SpA, Italy’s biggest bank, Italy has very strong fundamentals and its healthy economic growth is pushed by exports, consumers and investments, so “the core banking activity in Italy is actually quite profitable.”

As Bank of Italy data shows, banks’ operating profit for 2016 was down by 27%, mainly owing to a drop in income. And while shares of Italian banks may have jumped almost 8% since June compared with a 1% uptick in the Europe STOXX 600 Banks Index, that’s almost certainly a reflection of investor relief rather than a genuine belief that the Italian banking system’s deep-seated problems have been laid to rest with the recent interventions.

As Jim McCaughan, CEO of Principal Global Investors, told Bloomberg, the European banking system as a whole — and the Italian banking system in particular — has a questionable level of capital and that could lead to problems in the next economic slowdown. “For many banks, prosperity is very dependent on continuity of the economic momentum,” said McCaughan.

And continuity of the current reality is something that is far from guaranteed, especially given it depends almost entirely on the continued monetary support provided by the European Central Bank, which boasts a negative policy rate and the biggest balance sheet of any central bank on planet Earth.

The ECB knows that more banks will collapse, which is why it’s taking preemptive steps now to ensure that the next time an important bank begins to wobble, it can swoop down and freeze its customers’ deposits — insured or not. Unbeknownst to hundreds of millions of European citizens, the ECB is quietly tightening a noose around their savings. By Don Quijones.

Even Italian banks are dumping Italian government bonds. Read… What’s Keeping Italy’s Government Debt from Blowing Up?

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