Resolution in practice | KPMG | IE

Resolution in practice

Resolution in practice

The resolution of Banco Popular Espanol is the first resolution action taken by the Single Resolution Board (SRB).

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The resolution is important in demonstrating that the powers under the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) are capable of being activated quickly, and can be used without the need for taxpayer support.

In this case:

  1. the ECB concluded that Banco Popular was failing or likely to fail, in particular because of the rapid deterioration in its liquidity; 
  2. the SRB decided that there was no reasonable prospect that a private sale of Banco Popular could be completed in sufficient time (and presumably whatever recovery plan Banco Popular had in place had not succeeded in restoring the bank’s health); and 
  3. the SRB concluded that resolution action was in the public interest (rather than putting Banco Popular into insolvency proceedings) to ensure the continuity of critical functions (deposit taking, lending to SMEs and payment and cash services) and to preserve financial stability (Banco Popular was the sixth largest banking group in Spain).

The resolution used the bail-in tool and the sale of business tool in order to (i) write off the bank’s equity and additional tier 1 capital instruments; (ii) convert the bank’s tier 2 subordinated debt into new equity; and (iii) sell Banco Popular in its entirety to Banco Santander for the price of €1. The bank’s contingent convertible bonds were written down to zero.

This was a relatively straightforward resolution. There was no need to bail-in any creditors beyond those holding regulatory capital; there was no need to restructure the bank (for example selling assets to an asset management company); and there was no need to put any of the assets and liabilities of the bank into a bridge bank. In effect, resolution was used to wipe out the claims of the holders of regulatory capital (thereby absorbing the losses) in order to create an entity that was attractive for purchase by a larger bank at a nominal price. This would not have been possible without activating some of the resolution tools. In contrast to the criticism of the European authorities and their interaction with struggling Italian banks, this resolution together with the Spanish authorities has been deemed a success for the resolution framework.

FS Regulatory Insights: July 2017

FS Regulatory Insights: July 2017

EMA Region, July 2017

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