Overnight on Tuesday 6th June, medium-sized Spanish bank, Banco Popular, having suffered a “run” on its deposits and notified its regulators that it would struggle to open for business, was swiftly declared to be in danger of failure; put into resolution; and sold for a nominal Euro to Banco Santander.
Apart from the fact that this was the first true exercise of the new EU bank resolution regime (even if some argue it was not the “full-on” version), a number of aspects of what occurred are interesting.
Firstly, the event occurred some 10 years after the onset of the Great Financial Crisis, demonstrating that, even in economies such a Spain, which have begun to recover from its impact, banks can still fail because of the burden of their legacy portfolios. So, not surprisingly, questions are being ask about whether and how the resolution mechanism should be applied to ailing banks in Italy.
Secondly, unlike the politicized and botched shambles that constituted the “rescue” of the Cypriot banking system (and let us not even talk about the Greeks!), in the case of Banco Popular, the process worked remarkably swiftly and smoothly, within a space of 24 hours (and not even over a weekend.)
Thirdly, regulators wiped out the equity holders of the failing bank and all Euro 2BN of its subordinated bond holders, yet the contingent capital or “coco” market barely flinched.
Fourthly, there are concerns now about the health of a much smaller Spanish bank, Liberbank- perhaps because some “scent blood in the water”, and are looking for the next target. Thus, it will be interesting to see how the Spanish Central bank and the ECB address the risk of contagion.
Banco Popular, is by European standards a relatively small bank, so one cannot say that the “too big to fail” concept was tested. Nevertheless, unlike Italy, where there remains a continuing reluctance to allow even small banks to fail (largely for political reasons), the Spanish authorities have demonstrated that they can and will take action.
Of course, the real test will come when the resolution of a bank requires not just losses being imposed on equity and subordinated debt holders, but further up the liability structure on senior debt holders, or even depositors. Nevertheless, the swiftness of the exercise (given the number of parties involved) and the avoidance of having to use public funds are commendable, even if one can properly ask questions about why regulators had not imposed capital-raising requirements earlier on Banco Popular.
Returning to Italy, time may be running out for 2 banks in particular, Banca Popolare di Vicenza and Veneto Banca; as, if agreement is not reached by the end of June between the Italian authorities, the ECB and the EU, they too may suffer the same fate as Banco Popular.
And before those in the UK become too smug, bear in mind that UK banks are still subject to the EU Bank Resolution and Recovery Directive (BRRD) and its stipulation of haircuts on bank’s liabilities of up to 8% of their total before public funds may be used; and that Co-operative bank is struggling to raise capital and impose losses on its bondholders, making it too vulnerable to being “resolved”.
At Awbury, we have long worked closely with banks in helping them manage their capital and address problematic portfolios, which is why we always pay close attention to such events, as well as the potential impact of political and regulatory actions.
The Awbury Team