September 15, 2017 / 2:33 PM / a year ago

Former ECB board member says EU rules could pose bank run risks

TALLINN (Reuters) - European Union rules on winding down failing banks could increase the risk of bank runs, a former board member of the European Central Bank said, reigniting a debate triggered by the collapse of Spain’s Banco Popular.

The European Central Bank (ECB) presents the new 50 euro note at the bank's headquarters in Frankfurt, Germany, July 5, 2016. REUTERS/Ralph Orlowski

EU regulators shut Banco Popular, Spain’s sixth largest lender and saddled with a pile of bad loans, in June after it was fatally weakened by a sudden withdrawal of deposits.

Its activities and insured depositors were acquired by rival Santander for the nominal price of 1 euro.

That has prompted a debate on whether EU rules on bank resolutions - a mild liquidation - could have worsened Popular’s situation by contributed to the panic among its depositors.

Popular’s case was the first time that the rules, in force for less than two years, had been applied. They envisage losses for savers with uninsured deposits - meaning those over 100,000 euros - before a failing bank can be rescued.

“We should reflect on whether the resolution framework can accelerate bank runs,” Jose Manuel Gonzalez-Paramo, an ECB board member between 2004 and 2012, said in a contribution to Eurofi magazine, a financial publication.

Gonzalez-Paramo, who is now on the board of Banco Bilbao Vizcaya Argentaria (BBVA), also urged an alignment of rules to prevent different EU members treating failing banks differently.

Weeks after Banco Popular was shut, Italy rescued two regional lenders, Veneto Banca and Banca Popolare di Vicenza, using liquidation rules instead of the stricter resolution framework.

“We should avoid a better treatment in liquidation than in resolution,” Gonzalez-Paramo said.

His comments come as EU finance ministers are gathered in Tallinn, the Estonian capital, for a regular monthly meeting.

Banking liquidation rules are not on the agenda of the meeting, but talks are afoot elsewhere on amending them.

Regulators are debating whether to exclude uninsured depositors from the list of bank investors liable for losses in case of a rescue.

In parallel, EU states are also considering measures that would allow them to temporarily stop people withdrawing money from their accounts when a bank is in difficulty.

(This version of the story corrects headline to restore dropped word “could”)

Reporting by Francesco Guarascio @fraguarascio; Editing by Kevin Liffey

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