Threaten To Spread Panic Through Eurozone's Banking System
In the past week, the geopolitical spotlight found fewer catastrophes to focus on, so it instead focused on the newly drafted and soon to be imposed ECB banking laws that'll take effect over all state-based Eurozone banks starting the 1st of January. While this may not seem like a big deal right now, it could be the start of a potentially major global and regional banking crisis.
Among some of the powers they grant, these new banking rules will give the ECB and its newly-established Single Resolution Board the power to freeze banks of collapsing institutions and bank accounts. According to analysts, instead of resolving the issues, the opposite could end up happening. As a result, it could lead to wild panic across not only nationally-troubled banking systems like that of Italy, but it could also jeopardize the credibility and integrity of Eurozone's Banking System.
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How These New Banking Rules and Single Resolution Board Came About
It's now three years since European technocrats started working out this lawful and legal highly-acclaimed banking union. All this time, they've been intently looking to gain new powers that'll allow them to handle troubled national lenders better, especially considering the rampant banking problems that have been witnessed in Spain, Italy, Portugal, and now in Cyprus. The plan will allow them to halt all withdrawals from banks that are failing. These measures are only intended to be active for a couple of days as they try to contain and deal with the troubled institution.
The main aim is to stop banking runs. But still, the dilemma is that these efforts might end up back-firing, leading to results that are the opposite of what's intended. This could then lead to panic not only within the troubled institution but also throughout the entire financial system. In the event such a thing happens, you wouldn’t be talking about a Portuguese, Spanish, or Italian systemic issue, but possibly a problem with the power to quickly spread through the entire EZ banking system with a collapsing dominoes effect.
What ECB should consider doing instead is allowing national governments to pump more cash into prospectively-failing banks while they are working on restructuring them and finding willing financial partners to take over the said banks' operations, accounts, and liabilities. However, this is essentially a non-starter since it means that member state governments would be required to pony up resources for this important purpose, something most of them are not willingly ready to do at the moment.
The Pitfalls of the ECB's Single Resolution Board Plan
It was the Spanish Banco rapid, and thus far effective, resolution back in June this year that inspired the ECB and its partner, EZ's Single Resolution Board, to push for the powers to be able to freeze banks and accounts in what is referred to as a “moratorium.” Good thing is that they were able to effectively and successfully handle the failing Spanish lender by selling it off to the larger, better financially-positioned, and more powerful Banco Santander.
However, in order to do this, they were forced to rush in one workweek night as depositors were in the middle of a devastating run on with the bank. Regulators worry that another bank run instance and failure within the Eurozone in the near future could happen at a time that is less opportune ” a time when they're not able to come across a buyer within a single night. Nevertheless, with their newly found moratorium powers, this pressure could be drained off more effectively, and they'd be able to gain the necessary time to find willing buyers at a fairer, more advantageous price.
The Intrinsic Problems The German Banking Regulation Model Present
So far, the banking regulation model Germany put in place has been mostly successful. By shutting down failing banks, you can effectively stop runs on the banks. However, the problems lie in the fact that there will always be consequences that the regulators did not want or intend. Depositors may fear that their bank is slipping into issues and as a result, they may choose to bail out before it even does. This would be because they fear losing access to their funds should regulators seize the institution and shut it down.
Simultaneously, account holders would likely empty out their accounts as soon as the institution is reopened. But this likelihood is minute compared to the real drawbacks. By freezing a single troubled lenders accounts, the panic may end up spreading like wildfire through the entire national and international EZ banking system, with depositors all over the country becoming nervous that the same might fall on them and their banks next.
Such an impression will also endanger the so-far supportive efforts of bank resolution. The aggressive plans of EU regulators are already presenting a threat to the measures that have been put in place, even threatening to destroy measures that were put in place after the failure of Lehman Brothers in the height of 2008's Global Financial Crisis. It is The Bank of England economists who sounded the alarm in one of their publications where they flatly stated that taking up such a moratorium could lead to banks disavowing what they have already agreed upon contingencies for addressing financial emergencies.
The Resolution to The Impending Banking Crisis Isn't Likely to Be Recognized by the Power-Hungry EU Regulators
Analysts who've reviewed the situation have now come up with a sounder, less panic-evoking approach. This approach involves building up a Single Resolution Fund instead. The fund currently has a meagre 55 billion euros capacity ” a capacity that is way too little to be useful in the event a large national bank fails. At the same time, this amount won't be available online for several years at the very least; something that could possibly lead to cases of too little and too late. What the European Union should consider doing is quickly and massively increasing the size of this rainy-day banking fund.
By adequately and properly funding their SRF, the regulators could have the opportunity and tools they so desperately need to bail out financially-faltering and struggling banks without taking down the entire EZ financial system as a result. This might help stop any potentially looming financial crisis in global and regional banking if it so happens. However, this far-less and systemically-risky approach comes with one issue, a considerable upfront cost that not only requires additional finances but which also requires serious political willpower, two aspects that sadly are lacking in both The Eurozone and Europe in general.
What this means is that you need to desperately consider these issues and to handle matters on your own before it is too late. Your retirement and investment portfolios are nobody's concern but yours alone. No one in this world will care about your finances as much as you. That is why it is advisable that you consider getting a gold IRA. Now that you already understand why you need one take the time to understand what gold should go into an IRA. Another reason why you should consider owning gold in a time when financial crises are ever-looming is that gold is safe ” it's not like money, and it cannot bail out the bankrupt banking and sovereign systems.