After nervous customers panicked and drained their accounts, ultimately causing the collapse of Spanish bank, Banco Popular, equally jittery European Union officials are debating the merits of freezing access — preventing anyone from withdrawing any money — at the first sign of a bank run.
Proponents claim measures to halt a rush of withdrawals would prevent the downfall of floundering financial institutions at their most vulnerable point — in hopes of staving off a catastrophe at least as harrowing as that of 2008 — while detractors admonish the move might have precisely the opposite effect, with investors rushing to yank funds at the slightest indication of trouble.
“The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge,” ‘a person familiar with German government’s thinking’ told Reuters.
“Giving supervisors the power to temporarily block bank accounts at ailing lenders is ‘a feasible option,’ a paper prepared by the Estonian presidency of the EU said, acknowledging that member states were divided on the issue,” Reuters reports.
“EU countries which already allow a moratorium on bank payouts in insolvency procedures at national level, like Germany, support the measure, officials said.”
A cursory autopsy of last month’s Banco Popular failure had economic officials scrambling to figure out how best to prevent a similar financial debacle; but the idea of cutting customers’ access to their own funds when conditions warrant, blasts apart a Pandora’s Box of potentialities — all, favoring the State and banking industry over individual customers.
While officials contend cutting off account access would theoretically prevent a bank already in distress from going under, when scores of people withdraw money at once, the proposal toes a fraught but sacrosanct line blocking government overreach from private, individual finance.
According to the Estonian paper perused by Reuters, an additional measure proposed the development of a mechanism whereby customers in such a situation could withdraw “at least a limited amount of funds.”