The EU goes about sabotaging itself as expected.
Last week I explained how the EU’s proposed new rules on bank runs would cause bank runs:
The EU is considering new rules to prevent a bank run in the wake of runs on Spanish and Italian banks. Sounds good until you realise just how it plans to do it – by banning withdrawals. Initially, customers would be unable to withdraw their money for five days, but up to 20 days in extreme circumstances.
Of course this will only make bank runs more likely by incentivising them earlier at a lower threshold of risk.
If you doubted my analysis, consider the effect of the last round of EU regulation on banks.
When the EU’s Single Resolution Board (SRB) decided Spanish bank Banco Popular was “failing or likely to fail”, it triggered an intervention which saw the bank sold for a symbolic one euro under the EU’s new rules to prevent crises.
How likely?
Unfortunately, the bank’s owners disagree the bank was about to fail. They argue it was precisely the EU’s looming rescue which caused the failure. And they’re taking their arguments to the European Court of Justice. Their lawyer explained:
“The SRB not only failed to meet the legal requirements for ordering the resolution of Banco Popular, but precipitated the very liquidity crisis that led to its decision.”
“The illegal and unprecedented actions taken here jeopardise the credibility and integrity of the entire European banking system and post-crisis regulatory framework.”
By creating a system where the government intervenes before the potential failure of the bank, a failure is more likely to happen and happens earlier. Depositors, bondholders and shareholders abandon the bank earlier in anticipation of government intervention. If the bank is going to be sold for a euro when it’s “likely to fail”, you run for the exits earlier, which triggers the problem itself.
The importance here isn’t the failure of individual banks. If bank failures are made more likely by government policy at a lower level of risk, that raises the threshold of a systemic crisis. A mid-size problem is more likely to trigger an EU-wide financial crisis thanks to the EU’s policies.
We’ll see how the court case develops. But fears over the EU’s proposed rules to prevent bank runs are certainly justified given the experience of the EU’s bank wind-up rules.
Until next time,
Nick Hubble
Capital & Conflict
Category: The End of Europe