ECB Deposit Protection No Longer a Benefit
The European Central Bank (ECB) is looking to end covered deposits on balances of €100,000 (around US$117,500) that are held within the European banking system. The ECB proposes a new method of protecting depositors’ money within banks: putting restrictions on the amount of money that can be withdrawn. This would ensure that there would be enough money held within the financial institutions.
The proposal states that a request would need to be submitted before any money could be taken out. When a deposit request was submitted, the amount that could be withdrawn would be determined by the bank on a case-by-case basis. It would take five business days for a withdrawal request to get approved.
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Individuals looking to withdraw their money would only receive enough funds to cover their living expenses. The amount of money would be enough to cover consumer staples such as food, clothing, personal care products, utility bills, and so on.
With all this said, what does it mean for the ECB and the overall European banking system? Is there more or less confidence in the banking system? What are the benefits of the proposed changes to the banking system? All of this, and more, will be answered below.
Proposal to Give Government Control Over Depositors’ Own Money
This new proposal means that the ECB, which could be considered a form of unelected government, would give depositors an allowance on their own money. Savers would not be allowed to withdraw as much as they want, which gives more control to the central bank and other financial institutions. Simply put, the ECB would be putting a limit on the amount of money that could be withdrawn from a failing bank. It could be looked at as putting citizens on a budget.
Yes, it would provide more financial stability because the banks would be able to better control how much money is leaving and being held within its doors.
However, there is a negative economic effect. The plan would reduce consumer discretionary spending, particularly on luxury items such as vacations, restaurant meals, and other extracurricular activities. This then would hurt businesses that operate in segments of the market that rely on consumer spending.
The European economy could end up at a standstill. After money is withdrawn to pay for essentials like housing, utilities, and groceries, people would have little cash left available to spend in other sectors of the economy, such as the tourism and hospitality sectors.
The limits on bank withdrawals would result in the central bank having more control over the personal lives of European citizens. How? The restrictions would prevent individuals from being able to afford to leave their own countries, explore the world, and experience the lifestyles they desire—since they wouldn’t have enough disposable income available to do so.
It Possibly Erodes Confidence in the Banking System
In regards to confidence in the banking system, there are two points of view to look at: one from the outside looking in, and the other from within Europe’s borders.
From the outside viewpoint, these new proposals could lower travelers’ confidence in the banking system. For example, nowadays, tourists do not carry much cash, and they tend to use local banks when traveling. The new restrictions could disrupt people’s vacation plans and result in less tourism spending in local economies in Europe. This could snowball, in the sense that travelers might decide to avoid Europe and divert their tourist dollars elsewhere.
From the viewpoint of people who live in Europe, savers could feel worried and lose their overall confidence in their banking system. Citizens who have worked hard to save their money would not be able to withdraw it as they wish.
For instance, let’s say someone was saving money for many years, and now they want to take the money out for a big purchase. That person would, unfortunately, find that it could not be done. The central bank control would ripple into the daily lives of savers; they should not be punished now for something that they have been doing their entire lives.
With all these changes, there could be protests by angry savers, leading to a watered-down version of the proposal with fewer restrictions.
Official Reason vs. Real Reason This Is Being Done
The reason why the ECB wants to enforce these rules is that it prevents governments from having to pour billions of dollars into failing banks through bail-outs. It seems that even with tons of cash infused into the banks, there have been no permanent institutional improvements since the previous bailouts. A bailout is more of a band-aid method used to get a financial institution back on its feet. Citizens do not like this method because tax money is being used to prop up banks and let them off the hook.
The ECB proposes that, rather than governments getting their hands dirty with bailouts, failing banks would use the money of their depositors to prop themselves up. This pretty much traps savers, since there would be limits on how much money they can take out of the bank at any given time.
With ECB Deposit Protection Ending, What Can Savers Do?
1. Diversify Savings
This is two steps in one. The first step would be for savers to deposit money in more than one bank. This would give them more flexibility in terms of withdrawing money whenever they want. It would be even better to have bank accounts in as many countries as possible, for further diversification.
2. Take a Look at the Banks’ Balance Sheet
Savers should understand the risk that is associated with the banks that they have existing relationships with. They should look at the amount of leverage held by the bank. For example, if there is a large amount of mortgage loans outstanding or derivative books on a bank’s balance sheet, it may be best that the savings funds are held elsewhere. If the bank has a weak balance sheet, there may be even more restrictions on withdrawing money from that bank.
3. Monitor Deposit and Savings Account Terms
There could always be adjustments made to the ECB’s proposal. Therefore, savers should monitor any new changes and grasp an understanding of how it would impact the savings environment.
4. Own Precious Metals
One method of protecting savings from a value standpoint is by owning physical gold or silver. In uncertain times, gold and silver tend to appreciate in value. Since, under the ECB’s proposals, there would be restrictions on how much money could be taken out, savers who need a lot of cash at once could sell some of their gold or silver.
5. Avoid Investments With Counter-Party Risk
With investments, there are times when partnerships are formed. Initially, it is thought of as a benefit, since there is more exposure to a larger geographic reach. There is a negative aspect as well, because there are additional parties involved. For instance, a partnership of two companies will have two balance sheets. The company that your investments are held in could have a strong balance sheet while the same might not be said for the partnering company. This would then become additional risk if the appropriate research isn’t completed.
