La novela Banco Popular

When friends go out to dinner, the convivial atmosphere can be shattered once the waiter brings the bill. A pleasant evening can descend into a dispute about who had a starter and who ordered the lobster …

But at the end, someone has to pay the bill : “there is no free lunch” (or dinner !).

For the very first time, on June 7, 2017, the Single Resolution Board (so called the “SRB”) used its new powers conferred by the Bank Recovery and Resolution Directive, placing Banco Popular, the sixth largest banking group in Spain, into resolution.

Even if financiers like complicating everything, the story is not that hard to understand.

In a properly functioning market economy, when a company turns insolvent, it should exit the market in an orderly matter.

It’s easy to understand that there are some companies whose bankruptcies could cause a severely adverse impact to the economy as a whole, and not just to the industry. Big financial institutions definitely enter into this category.

During the financial crisis, a lack of appropriate tools for the resolution of banks resulted in the necessity to resort to public funds, as they were considered as “too big to fail”. Experts use the word “bail-out” to define this situation in which a business, an individual or a government offers money to a failing business to prevent the consequences that arise from the business’s downfall. Bail-outs can take the form of loans, bonds, stocks or cash. They may eventually require reimbursement.

At the beginning of the Great recession, governments used trillions of dollars of taxpayer’s money to rescue the big banks, while ordinary people were loosing their jobs and homes. It became a justified source of resentment.

The general idea became then to require the investors and depositors in the bank to take a loss before taxpayers (what we call “bail-in”).

Bail-ins attracted attention in 2013 after government officials resorted to it in Cyprus. In the aftermath of the crisis, both the European Union and the U.S. have then restricted the use of government bail-outs. In Europe, it was done through a regulation called the Bank Recovery and Resolution Directive (“BBRD” for those who like the acronyms)

Banco Popular was the sixth biggest bank in Spain, with market shares especially on the Small and Medium Enterprises market that gave the bank a high systemic importance within its domestic markets.

On June 6, 2017, European Central Bank, considering that the entity was “failing or likely to fail”, and that there was no reasonable prospect that any alternative private sector measures or supervisory action would prevent this failure within a reasonable timeframe, asked the SRB to place the entity under resolution.

The SRB adopted a resolution scheme – ultimately validated by the European Commission – consisting in :

  • the write down of all existing shares capital (valued at roughly 2.1 GEUR at the time of the decision) to zero euros ;
  • the conversion of all the additional so called “Tier 1” instruments (1.35 GEUR of outstanding) into shares, involving a capital increase of the same amount, those shares being subsequently written down to zero euros ;
  • the conversion of “Tier” 2 instruments (0.7 GEUR of outstanding) into new shares ;
  • the sale of those new shares to Banco Santander, for the symbolic price of one EUR.

Senior unsecured bonds and deposits remained untouched, becoming obligations of Banco Santander.

In the middle of August, a group of bondholders applied to the European Court of Justice. They don’t criticize the order the creditors were called to pay the bill, but want to see the all process annulled, claiming the EU officials undermined investor confidence in the Spanish bank – eventually accelerating deposit outflows – before agreeing the resolution scheme. Incidentally, it creates some kind of legal uncertainty about the status of the original Banco Popular securities, a good news only for lawyers.

The saga is not over.


Iconography : Francisco de Goya, Still Life with Golden Bream, 1808-1812, oil on canvas, 62.5 × 44.8 cm © Museum of Fine Arts, Houston, Texas.


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