Many Banco Popular investors wiped out. Taxpayers off the hook.
What it means for Italy.
Banco Popular, until today Spain’s sixth biggest bank, is no more. Its
assets, including a massive portfolio of small-business clients, now belong
to Banco Santander, Spain’s biggest bank. The global giant now has 17
million customers in Spain, a country of just 45 million people. The price
was €1.
Spain’s Ministry of the Economy revealed that by 3 pm Tuesday, Popular was no longer able
to contain the deposit outflow. “It had exhausted all its lines of liquidity,
both ordinary and extraordinary.” It had run out of collateral to cover any
further lines of emergency liquidity.
This apparently triggered the intervention by the ECB’s Single
Resolution Board (SRB), which decided on Tuesday that the bank “was failing
or likely to fail” and would have to be wound down, unless a buyer could be
found.
Banco Popular’s shareholders, who’d been repeatedly suckered into handing
Popular fresh funds in numerous capital expansions, will be wiped out.
Holders of Popular’s riskiest bonds, its AT1 bonds and AT2 bonds, or CoCo
bonds, also got wiped out. These bonds had already plunged in recent weeks.
But the bank’s senior bondholders and depositors were spared.
To plug the remaining hole of Popular’s non-performing loans, Santander
has said it will set aside €7.9 billion, most of which will be raised in a
fresh €7 billion rights issue.
“The decision taken today safeguards the depositors and critical functions
of Banco Popular. This shows that the tools given to resolution authorities
after the crisis are effective to protect taxpayers’ money from bailing out
banks,” said Elke König, chair of the SRB, in the statement.
This marks the first time under the EU’s Bank Recovery and Resolution
Directive, passed in January 2016, that shareholders and subordinate
bondholders of a European bank have not been bailed out by taxpayers, but
where “bailed in.”
And it was the first time that a banking failure was allowed to occur
in either Spain or Italy whose resolution didn’t involve taxpayer
intervention. Perhaps the Eurozone’s banking authorities are finally growing
some teeth. The fact that financial markets received the bail-in of
Popluar’s investors calmly tells the ECB that investor bail-ins are the
route to go. And so the rule takes hold.
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Next Stop: Italy
The ECB’s decision to wind down Popular stands in sharp relief with its
decision last week to award Italy’s Monte dei Paschi di Siena a last-minute
reprieve, on the grounds that the Italian lender was not insolvent, just
liquidity challenged. If it goes ahead, the rescue of MPS will be the largest government intervention in Italy’s financial
sector since the nationalization of Italian credit institutions during the
Mussolini dictatorship.
MPS’s stay of execution probably had a lot more to do with its size and
relative degree of systemic importance (i.e. contagion threat) than the state
of its financial health. But Italy is brimming with teetering mid-sized banks
that, like Banco Popular, are perfect candidates for a bail-in. Of
Italy’s 500 banks, 113 are at risk (with a “Texas Ratio” of 100 or more) and 24 are seriously in
trouble (with a TR of over 200%).
They include the two mid-sized Veneto-based banks, Banca Popolare di
Vicenza and Veneto Banca, which have already received billions of euros in
taxpayer assistance but are still desperately trying to avoid a bail-in. To
qualify for more public funds they were instructed by the European Commission last week to find
an additional €1 billion in private capital.
Then there are banks like Banca Carige, which has been sinking in recent
days after the bank’s top investor criticized CEO Guido Bastianini and
its chief financial officer for their management. As Bloomberg reports,
the lender is seeking to replenish capital through a €450 million stock sale and
reduce bad loans to stay afloat.
Contagion Risk
Bail-ins of investors are the way banks should be resolved, but in banking
systems that are beset with deep-seated structural problems, such as Italy,
there is a risk that bailing in one or two banks could prompt depositors and
investors to move funds from weak banks to stronger ones (including banks
outside the country), creating liquidity stress and even bank runs.
As we’ve seen in the collapse of Popular, banks can often have existential
issues simmering away in the background for months, if not years, but once
they’re thrust into the foreground, it can take just days for the confidence
of depositors and investors to completely vanish.
In Spain, there are far fewer banks today than they were six years ago, at
the onset of the country’s banking crisis. As such, the risk of contagion
spreading from one bank to another is limited. By contrast, in Italy, where
the problems with the banks, in particular the preponderance of
non-performing loans, have been left to fester for years, the contagion risks
both within the banking system and beyond it are extremely high. By Don Quijones.
But in Italy, bank bail-outs are hobbled by the government’s giant debt
that is already “vulnerable to market turbulence.” Read… Despite
the Hype, Italy’s Banking Crisis Metastasizes
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