Spain’s Government Unveils Cunning Plan to Allay Banking-Related Jitters

There’s one little catch…

The Spanish Government has a brand new cunning plan to fortify the country’s banking system, which was rocked last year by the collapse of the sixth biggest bank, Banco Popular. It wants the country’s Deposit Guarantee Fund (DGF) to insure the entire bank deposits of large companies, even if those deposits exceed the current limit of €100,000, so that if a bank begins to wobble, its corporate customers don’t take their money out en masse.

The government hopes that the plan will be included in the new banking resolution rules being drawn up by EU banking authorities in the aftermath of Banco Popular’s quickfire resolution last year, the financial daily Cinco Dias reports.

If the law is passed, it would mean that corporate deposits of any amounts would be guaranteed in case of a bank’s resolution. The proposal apparently enjoys the enthusiastic support of Spain’s major banks, large companies, and the president of Spain’s Fund for Orderly Bank Restructuring (FROB), Jaime Ponce. The government also wants the deposits of large public institutions to be covered without limit, as well as those of small and medium size enterprises (SMEs).

The new law would help prevent large scale deposit flight, which became endemic during Spain’s banking crisis and was also instrumental in the collapse of Popular. According to Ponce, if the government’s newly proposed measure had been in force between May and June last year, the frantic run on the bank’s deposits from Popular would never have happened.

But there’s a problem with the plan. Spain’s Deposit Guarantee Fund (DGF) doesn’t have nearly enough funds in its coffers to cover large institutional deposits

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