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EU explores account freezes to prevent runs at failing banks

By Francesco Guarascio

BRUSSELS (Reuters) - European Union states are considering measures which would allow them to temporarily stop people withdrawing money from their accounts to prevent bank runs, an EU document reviewed by Reuters revealed.

The move is aimed at helping rescue lenders that are deemed failing or likely to fail, but critics say it could hit confidence and might even hasten withdrawals at the first rumours of a bank being in trouble.

The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits at Banco Popular contributed to the collapse of the Spanish lender.

It also come amid a bitter wrangle among European countries over how to deal with troubled banks, roughly a decade after a financial crash that required the European Central Bank to print billions of euros to prevent a prolonged economic slump.

Giving supervisors the power to temporarily block bank accounts at ailing lenders is "a feasible option," a paper prepared by the Estonian presidency of the EU said, acknowledging that member states were divided on the issue.

EU countries which already allow a moratorium on bank payouts in insolvency procedures at national level, like Germany, support the measure, officials said.

"The desire is to prevent a bank run, so that when a bank is in a critical situation it is not pushed over the edge," a person familiar with German government's thinking said.

To cover for savers' immediate financial needs, the Estonian paper, dated July 10, recommended the introduction of a mechanism that could allow depositors to withdraw "at least a limited amount of funds."

Banks, though, say it would discourage saving.

"We strongly believe that this would incentivise depositors to run from a bank at an early stage," Charlie Bannister of the Association for Financial Markets in Europe (AFME), a banking lobby group, said.

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