ECB is considering freezing bank transactions in crisis

The ECB Banking Supervision is thinking of freezing banks that have been in trouble for several days.

In order to temporarily protect crisis banks from massive withdrawals and the access of creditors, the EU states want to be able to temporarily free up credits. The head of the European bank resolution authority, Elke König, does not go far enough: In addition to bank deposits - for a limited period - other "debts" of the institutes must be protected. "It has great advantages if such a tool includes all liabilities," she told the Reuters news agency at the "Euro Finance Week" in Frankfurt.

King's proposals are nothing more than the complete freezing of a bank with all its claims and liabilities - a practice that the financial expert Jim Rickards calls the "Ice Nine" theory.

King wants authorities to protect distressed banks from access by their creditors for "two to seven days, ideally five days". During this period - known in the jargon as "moratorium" - supervisors and liquidators could then, for example, initiate the splitting of the institution into a viable part and a "bad bank" or organize the distress sale to another bank. The current EU plan envisages blocking account disbursements for five working days and "in exceptional circumstances" extending the suspension to up to 20 days.

In the face of a still around 800 billion euro mountain of loans at risk of default, supervisors urge the banks in the monetary union to act. Although it has been possible in the past two years to reduce the problem loans in bank balance sheets by about 200 billion euros. However, the rest remains an immense threat to the stability of the financial system, warned ECB Director Sabine Lautenschläger, responsible for banking supervision. "That's why banks have to act now."

Head of European Banking Authority EBA, Andrea Enria, said there were still "a lot of banks that did not do enough". In eight of the 28 EU countries, the bank's non-performing loan rate is more than ten percent - well above the EU average of 4.5 percent. Affected are above all financial institutions in southern Europe. Elke König demanded that banks urgently consider how to reduce their burden of bad credit.

The ECB, which has been directly overseeing the 120 most important banks in the euro area for a good three years, is currently discussing a solution to the problem with the large institutions involved. A high level of non-performing loans is not just a problem for a single institution because it can put it in a difficult position. On a macroeconomic level, high levels of bad credit are also bad because the banking system is no longer able to provide companies and households with new loans for investment. This slows down the economy and puts a strain on the economy.

Lautenschläger said she only wanted to call banks to provide additional capital in an emergency to cover the bad loans. If the discussions with the institutes fail, the supervision could tighten the thumb screws, however "only if the results of this structured dialogue do not convince us", said the former Bundesbank vice-president. The bank guards want to begin their comments in November, to give the institutes to their plans feedback. Lazy lending had also contributed to the collapse of several Italian banks in the recent past.

The Italian Government is currently baulking at the ECB's proposed rules for higher capital reserves with European banks. The ECB hinted at accommodating the majority of Eurozone finance ministers behind the proposal.

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