EU banking resolution rules pass credibility test with Banco Popular

SRB chairman Eike König said that the intervention met the goals of protecting depositors and the public interest. [Bankenverband/Flickr]

The new Single Resolution Board intervened for the first time early this morning (7 June) to save Banco Popular, a troubled Spanish bank whose deposits were protected without using taxpayers’ money after Banco Santander decided to acquire its assets.

Santander bought Popular for €1 and it announced that it will invest €7 billion to cover Popular’s compromised assets and increase its capital buffers.

Last quarter, Popular said it had €37bn in non-performing assets.

In return, Santander will consolidate its position as Spain’s largest bank and will dominate the credit market for small and medium-sized enterprises (SMEs), in which Popular is a strong player.

Bank resolution authority set for launch

The Single European Mechanism (SRM) will be launched over the next three months, with the aim of rescuing or winding up stricken banks with minimal recourse to taxpayers’ money.

“It was a long night,” the chair of the SRB Elke König told reporters. Just five hours earlier, the institution created in 2015 had approved the first ever scheme to transfer Banco Popular, Spain’s sixth-largest bank, into safe hands.

The bank suffered a “severe” liquidity shortage after losing many depositors over recent months, and market confidence evaporated, as potential buyers of the ailing bank disappeared, officials explained.

The situation deteriorated so quickly that the SRB did not wait until the weekend to intervene, as is usually foreseen for the process of winding down banks.

“It was necessary not to wait anymore,” SRB member Dominique Laboureix said.

No alternative

The decision came after the ECB informed the SRB late on Tuesday that the bank was “failing or likely to fail”.

Officials from Spain’s Ministry of Economy explained that the bank had exhausted all liquidity assistance tools on Tuesday at 3 pm. Without the intervention, Popular would not have opened today, they said.

After an intense night of contacts, phone calls, paperwork and exchanges of proposals between the ECB, the SRB, the Commission and Spain’s bank resolution fund (FROB), the EU and Spanish authorities decided to look for the best option to sell Banco Popular immediately.

König was satisfied with the result. The stock price stabilised after the opening of the markets, and Banco Popular business “was conducted normally”, she said.

For the EU authorities, the Spanish government and expert observers the intervention was a success.

König highlighted that the SRB operation had achieved its goals. It saved the bank’s deposits, ensured the critical functions of the financial services provided by Popular, particularly important given its dominant position among SMEs, and protected taxpayers’ money as no public funds were used to rescue the bank.

Spain’s Minister for Economic Affairs Luis de Guindos said it was a good solution since no public funds were used, and therefore “without sparking a possible contagion between sovereign and bank risks, as has happened in the past”.

The European banking system continues to raise doubts, as many companies are still struggling with the legacy of the crisis and significant volumes of bad assets.

Political hurdles cleared in Spanish bank bailout

The Eurogroup today (20 July) announced it would grant a bailout of up to €100 billion to Spain to help the country recapitalise its banks, following a telephone conference call during which finance ministers gave their backing to the rescue plan.

As a result of the burst of the construction bubble, Spain received a €40bn bailout to save its banks.

But in the case of Banco Popular, Brussels and Madrid highlighted that the damage had been contained and trust restored. The EU resolution rules passed their first serious test.

“They have proven that resolution can work for a domestic systemically important bank and there is no longer any justification to use taxpayers’ money when one of these banks gets into difficulties,” said Finance Watch analyst Christian Stiefmuelle.

König stressed that the Santander proposal was the best not only because of its capacity to cover the bank’s financial needs but also because it gave “confidence” as it was a “long-term solution”.

She declined to detail what other banks put forward proposals to buy Popular. Spanish officials confirmed that BBVA was also a bidder, although it did not meet the requirements set by the FROB and the SRB.

The SRB intervention did not bring good news for everybody. Junior bondholders and shareholders lost all their asset value with the operation.

The snap decision also sparked some questions as to whether other alternatives would have been possible in order to save the bank.

SRB officials explained that emergency liquidity assistance would not have solved the problems given that the bank was not viable. They added that they could not have applied that option either to buy time and look for better offers, as liquidity assistance is not part of the SRB’s toolbox, and neither the ECB nor Spain’s central bank considered the option.

Monte dei Paschi bailout accepted with severe restructuring plan

The European Commission and Italy agreed on a bailout for embattled bank Monte dei Paschi that would pave the way for the injection of billions of euros.

The intervention to save Banco Popular contrasts with the rescue programme approved by the European Commission last week for Italy’s Monte dei Paschi, after the world’s oldest bank agreed to a severe restructuring plan.

In the case of the troubled Italian bank, the EU authorities approved a precautionary recapitalisation that could total €8bn to ensure its viability.

These interventions cast a shadow over the ECB’s stress test, as both Monte dei Paschi and Popular passed the test last year.

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