Bail-in at Banco Popular Espanol makes it a model for future failing banks Darren Chowles darren@netdreams.co.uk

Drowned out by the noise of last week’s UK general election, one event went under the radar: the first demonstration of the formal and swift bail-in of a failing bank under the EU’s Bank Recovery and Resolution Directive (BRRD), making it a model for future interventions without using public funds.

Early last week the European Central Bank designated Banco Popular Espanol SA as one which is ‘failing or likely to fail’. The bank had been weighed down by its lending to Spain’s real-estate sector, had around €37 billion of non-performing loans and suffered a severe liquidity shortage. The Single Resolution Board, tasked with the orderly resolution of failing banks, acted quickly and by 6th June the SRB had forced the sale of the troubled bank to Banco Santander for a token sum of €1. The markets barely noticed but those who did were Popular’s shareholders and junior bond holders who were wiped out in the bail-in by the regulator before the sale to Santander went ahead.

The EU’s banking resolution regime has gained credibility by this decisive action – the regulator did not even wait for the weekend. The restructured Banco Popular was able to open and operate normally the next day, which is important given its dominant role as a lender to SMEs. Also, contagion between sovereign and bailed out bank, which often ended with calamitous consequences for taxpayers less than a decade ago, was avoided. Senior creditors and depositors were not affected in this instance – Santander will be raising €7 billion fresh capital to clean up Popular’s loan book – but in the future should a bank be in difficulty where the capital gap is larger, then senior unsecured creditors and institutional depositors could be affected.

If this episode shone a spotlight on EU banking supervision, it is that both Banco Popular and Monte dei Paschi di Siena (the troubled Italian lender which agreed to a severe restructuring plan before requesting a helping hand from the state) passed the European Banking Authority’s stress tests last year.