EU parliament’s moratorium plan billed ‘recipe for bank run’

The European Parliament has put forward its own proposal for rules on temporary closures of failing banks that would allow two rather than one two-day moratoria on payments, as long as the bank is reopened for at least one business day in between, Risk.net has learnt.

The proposal was made at a May 17 meeting of members of the European Parliament (MEPs), say banking industry lobbyists and lawyers. But rather than preventing a run on the feeble bank – as the rules intend – the new plan could encourage it on the day the lender is temporarily reopened, as counterparties and depositors might fear the imposition of another moratorium or ‘stay’ the following day.

“The two-day close, one-day open, two-day close…isn’t credible,” says a senior London-based lobbyist. “Imagine you can’t take money out of your bank for two days, then you’re told you can take money out on the third day but you might not be able to the following day and the day after that – what are you going to do?”

Knox McIlwain, senior counsel at law firm Cleary Gottlieb, is equally critical: “Re-opening the bank for a single business day before it has been stabilised would be a recipe for a bank run.”

The suggested two-day stay would be applied before the troubled bank was put into resolution by national or European Union authorities, adding to the two-day in-resolution moratorium allowed under existing EU rules.

The proposal will form part of trilogue discussions between the parliament, the European Commission and the Council of the European Union on revisions to the Bank Recovery and Resolution Directive, due to conclude by the end of July. The commission’s preference is for a moratorium totalling no more than 12 consecutive business days, with up to five of those applying before the start of resolution proceedings. The council, meanwhile, has said there should be just one stay of two days maximum, either before or during resolution.

The lobbyist says banks are hoping MEPs will give ground on their moratorium plan in return for amendments to other aspects of the BRRD II. Their preferred proposal is the council’s.

The lobbyist adds that a possible bank run during the one-day reopening could complicate the orderly unwinding of the bank, as it would sap its liquidity and dent confidence among counterparties, depositors and in the broader market. “The [EU] resolution framework and resolution authorities’ plans are intended to provide confidence that a bank can be resolved smoothly with minimum disruption to critical functions. That’s the whole point of the resolution framework.”  

The resolution authority always must be in a position to buy enough time to do its job even in complicated cases, without having to rush the procedure

Markus Ferber, MEP

Cracks in the parliament’s unity give banks reason to hope. For example, German MEP Markus Ferber supports a moratorium of at least five days and opposes any gaps between bank closures, also because of the fear this could lead to bank runs.

“I am in favour of a long enough moratorium period to prevent bank runs and always reach the weekend. The resolution authority always must be in a position to buy enough time to do its job even in complicated cases, without having to rush the procedure. I have doubts that a staged approach with a ‘gap’ in the moratorium period could achieve that goal satisfactorily,” he tells Risk.net.

The parliament’s main negotiator on the BRRD, Swedish MEP Gunnar Hökmark, did not immediately respond to a request for comment.

The council’s proposal for a moratorium of up to two days is the closest to banks’ ideal option, which is to keep the current in-resolution two-day stay. The council’s and the parliament’s two-day limit on any one stay is in line with an internationally agreed ceiling, set out in the resolution stay protocols by the International Swaps and Derivatives Association. However, Isda lobbyists have previously argued against the introduction of a pre-resolution moratorium on the grounds that the US may then not deem EU rules “substantially similar” to its own.

That is because the Federal Reserve allows only an in-resolution stay, and banks have argued a pre-resolution stay could precipitate a liquidity crisis at the failing bank before it has been propped up.  

US banks worry that, if the Fed does not find the EU stay regime substantially similar to its own, they will not be able to net their derivative positions for the purposes of calculating counterparty capital requirements. This could discourage US banks from entering into swap contracts with EU banks.

So far the Fed has declined to comment on any of the EU’s moratorium proposals, but multiple sources in the banking industry say it is unlikely to recognise the European Parliament’s proposal.

Editing by Olesya Dmitracova