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EU Softens Push to Keep Clients From Exiting Failing Banks

Updated on
  • Diplomats may bring rule in line with international standards
  • Clients could face shorter payment stays when banks fail

European Union policy makers are softening plans to stop clients pulling money from banks suffering a financial crisis, according to a draft plan seen by Bloomberg News.

Regulators have been debating the length of time that traders and other clients should be suspended from yanking funds when a lender is deemed to be failing. An earlier proposal for two separate moratoria, each lasting as long as five days, has been shortened to two days maximum in the latest version of the policy after banks warned it would lead to systemic risk.

The new draft, written by Bulgaria as the current holder of the rotating presidency of the EU council, will be discussed privately on Thursday by diplomats in Brussels. It would in principle cover almost all of a bank’s obligations, with only a small list of exemptions, though authorities can tailor the moratorium to each specific case.

Deposits could also be frozen, though retail customers and small companies would get access to “an appropriate daily amount to cover the cost of living or the regular administrative expenses for running the business,” according to the latest draft.

Policy makers are wrestling with how best to give supervisors the flexibility necessary to handle a meltdown while also staying in line with international standards. Banking authorities in Europe support the introduction of a moratorium after the failure of Spain’s Banco Popular Espanol SA in June left officials racing to find a solution overnight. They finalized the lender’s sale to Banco Santander SA before markets opened.

The Brussels-based Single Resolution Board, which is responsible for dealing with the biggest banks in the euro area when they get into trouble, would still prefer a five-day version of the moratorium, according to a representative who requested not to be named in line with protocol. That way, it could buy the time it needs to resolve problems at a lender over a weekend, even it’s found to be failing early in the week, the official said.

Out of Sync

The new plan comes after the Bank of England had earlier warned of “very serious consequences” if the EU were to proceed with a five-day moratorium as it would be out of sync with the international and industry standard of two days, particularly for derivatives.

The changes sought are necessary to avoid “unintended negative consequences to financial markets” and to provide “a fit-for-purpose tool that should be available to resolution authorities,” according to the document. A spokeswoman for the Bulgarian presidency declined to comment on the document.

The proposal would allow supervisors to use the payment stay after declaring the bank “failing or likely to fail” or instead do so when the lender has entered resolution proceedings. The industry has argued the pre-resolution moratorium could actually encourage bank runs at the first sign of stress at a lender.

“We are concerned that if the EU diverges from the global standard” it would create uncertainty and could put institutions in the bloc at a “competitive disadvantage in terms of capital requirements and the ability to interact with non-EU counterparties in derivatives and other markets,” according to Scott O’Malia, chief executive officer at the International Swaps and Derivatives Association.

Lawmakers in the European Parliament, who have to agree to a final text, have also said that they favor a version of the moratorium that’s shorter than what the commission proposed.

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