This last week, the geopolitical spotlight has found fewer catastrophes to shine on, so it has focused instead on the new ECB-drafted (and soon to be enforced) banking laws that will take effect over all of the Eurozone member state based banks starting January 1st. You may not think this is a big deal yet, but in fact it represents a potential regional and global banking crisis in the making.
Among other powers which they grant, the new banking rules will permit the ECB and its new Single Resolution Board to freeze bank accounts and banks of failing institutions. Rather than resolve the issues, analysts say this will likely cause just the opposite to happen. It threatens to spread wild panic across not only nationally troubled banking systems like Italy’s but also jeopardizes the integrity and credibility of the entire EZ banking system.
This is only the latest reminder of why you need gold in your IRA. Gold has historically been your best proven safe haven asset in times of financial turmoil and market chaos. It will protect you if this latest wrinkle over in Europe’s financial system erupts into a full-blown banking crisis. What Germany and Kyrgyzstan know can protect your retirement portfolio.
How This Single Resolution Board and New Banking Rules Came About
It is now three years since the European technocrats began working out this much-lauded banking union. All this time they have been earnestly seeking to gain new powers that will allow them to better handle the many national lenders in trouble (particularly with the rampant banking problems in Italy, Spain, Portugal, and now Cyprus again). This latest plan allows them to halt all withdrawals from any bank which is failing. The measure is only intended to be for several days as they are containing and dealing with the problem institution.
The goal of course is to stop any banking runs. Yet the dilemma is that their efforts might instead back fire and lead to the opposite end result, creating panic in not only the single troubled institution, but also the entire financial system. In such a disturbing case, you would then not only be talking about an Italian, Spanish, or Portuguese systemic problem, but possibly one that has the potential power to spread across the entire Eurozone banking system like a worrying series of collapsing dominoes.
What the ECB should do instead is to allow the national governments to pump cash through such a prospective failing bank all the while they are busy restructuring it and finding a willing financial partner to take over the bank’s operations, liabilities, and accounts. Yet this is a non-starter precisely because it means that the member state governments would have to pony up more resources for this crucial purpose, something which many of them are simply not agreeable to do right now.
Pitfalls of the ECB Single Resolution Board’s Plan
It was the rapid and so-far effective resolution of the Spanish Banco Popular affair back in June of this year that encouraged the ECB and its subsidiary partner the Eurozone Single Resolution Board to cry out for these huge powers to freeze banks and bank accounts in what they refer to as a “moratorium.” They were able to successfully wind up the failing Spanish lender through selling it off to its larger, more powerful, and better financially positioned Banco Santander.
Yet in order to accomplish this feat, they had to rush in one night during the work week as the depositors were in the midst of a devastating run on the bank. Regulators now worry that the next instance of such a bank run and failure in the Eurozone could come at a less opportune moment when they are not able to secure a buyer in a single night. With the newfound moratorium powers, the pressure would be drained off and they would gain the necessary time to find a willing buyer for a more advantageous and fairer price.
The Inherent Problems With This German Model of Bank Regulating
Germany has so far been successful with this type of a measure in place. By closing down a failing bank, you definitely do stop a run on the bank. The problem lies in the fact that there are always consequences which the regulators do not intend or even want. The depositors might fear their bank is slipping into trouble and abandon it sooner than it should fail as a direct consequence. They would be motivated do this out of a very real fear of losing access to their money should the regulators seize and close it down until further notice.
At the same time, the account holders would be likely to empty such accounts as soon as the bank was permitted to reopen. Yet even this danger pales in comparison to the real pitfalls. By freezing the account of a single troubled lender, the panic might spread like a wildfire throughout the entire national (and even international Eurozone) banking system, with other depositors around the country nervous that this same event might befall them and their own bank next.
Such an idea also imperils the so-far cooperative efforts on bank resolution. The plans of these aggressive EU regulators are already threatening to destroy those measures which were established following the 2008 failure of Lehman Brothers at the height of the Global Financial Crisis. It was economists at the Bank of England who just sounded the alarm in one of their papers in which they flatly stated that accepting such a moratorium could cause banks to disavow their presently arranged contingencies for addressing any financial emergencies.
The Answer to This Brewing Banking Crisis Is Not Likely to Be Accepted by the Power Hungry EU Regulators
Analysts who have reviewed the situation have come up with another sounder, less panic-causing approach. This involves instead building up the Single Resolution Fund. The fund presently has a mere 55 billion euros capacity, an amount which is way too small to be effective in the event of a large national bank failure. Even this limited amount would not come online for literally years, quite possibly creating both a case of too little and too late at once. What the EU ought to do instead is to massively and quickly increase the size of this rainy day banking fund.
By properly funding their SRF, they could give the regulators the tools and the opportunity they desperately need to wind down struggling and financially faltering banks without having to take down the entire Eurozone financial system in consequence. It might serve to stop the possibly imminent next crisis in regional and global banking if they did it too. The problem is that this far less systemically risky solution present a considerable upfront cost of not only additional finances but also serious political willpower, both of which are sadly lacking in today’s arena in both Europe in general and the Eurozone.
What it means for you is that you desperately need to take these matters into your own hands. Your investment and retirement portfolios are your concern and yours alone. No one anywhere in the world cares about your money nearly as much as you do. This is why you have to get gold for your IRA. Now that you understand that you need it, consider what gold goes in an IRA. For another reason why you should own gold in times of financial crisis, just remember that all the gold on earth can’t bail out the bankrupt sovereign and banking systems.