The paper first examines to what extent Banco Popular’s resolution case can be considered a circumstantial success given the resolution regime’s excessive reliance on the market. Further, the author assesses how the booming litigation that ensued Banco Popular’s resolution and sale to Santander for one Euro questions the European Banking Union’s confidentiality regime, with a view to the protection of the interests of the investors affected by their decisions.
FSC Research Workshop 2018
1 November 2018
Policy paper contribution
Source: Financial Risk and Stability Network
Diane de Charette, PhD Candidate, University Paris II Panthéon Assas
The paper has been prepared as an accompanying contribution to the Financial Stability Conference 2018 held October 31 in Berlin and presented at the FSC Research Workshop the day after at TU Berlin. Researchers from various institutions and with different backgrounds had been invited to draft policy-oriented contributions on selected aspects of the conference to be presented at the workshop, published and enclosed in the conference report.
The Banco Popular (BP) resolution marks a milestone in the development of the incipient Banking Union. The bail-in of its creditors and its subsequent sale to Santander represented the first time the Single Resolution Board (SRB) has used its powers under the Single Resolution Mechanism Regulation to write down and restructure a bank’s liabilities. Indeed, other banks deemed failing or likely to fail since the setup of the SRB in 2015 have all been wound up under their respective national insolvency laws.
While the European Monetary Union benefitted from the experience and theorization of the ‘Bundesmodel’, the Banking Union established a new, untried common system of supervision and orderly resolution of failing financial institutions. Hence the BP case was eagerly awaited by market participants, to observe how a bank’s capital structure would be used when a bank faces financial difficulty, and if both financial stability, taxpayers and creditors’ interests are adequately protected and balanced under the new regime.
The Spanish bank began showing signs of distress as early as 2016, aggravated by its sentence to compensate its clients for the floor clauses in home loans violating consumer protection laws. In April 2017 the chairman indicated that the bank needed a capital increase, and raised the possibility of selling the bank to a competitor. Reflecting concerns over its exposure to bad real estate assets -37 billion euros of nonperforming loans-, BP’s ratings plunged. Following further alarming announcements, the bank experienced increasing deposit outflows. The bank’s share price collapsed from 69 to 32 cents, as the depleting capital approached the trigger level at which Alternative Tier 1 instruments (‘AT1’) would convert into bail in able bonds.
On the 6th June 2017, the ECB determined that BP filled the first of the three conditions for resolution, being ‘failing or likely to fail’, as ‘the significant deterioration of the liquidity situation of the bank […] led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due’.
On the 7th June, the SRB decided that the two other ‘no private alternative’ and ‘public interest’ conditions were filled, and put BP into resolution. This triggered the writing down of shareholders and junior creditors, including Tier 2 and AT1 Bonds, among which ‘contingent convertible bonds’. The SRB then approved the sale of Banco Popular to Santander for one Euro. With immediate effect, BP continued to operate under normal business conditions as a solvent and liquid member of the group Santander.
In this article, we shall first examine to what extent BP’s resolution case can be considered a circumstantial success given the resolution regime’s excessive reliance on the market (I). In addition, we will assess how the booming litigation that ensued BP’s resolution and sale to Santander for one Euro questions the EBU’s confidentiality regime, with a view to the protection of the interests of the investors affected by their decisions (II).
Feedback and comments are welcomed