June 8, 2017 / 3:14 PM / 9 months ago

How Popular was caught off guard by Europe's abrupt takeover

MADRID (Reuters) - When the 1,644 Spanish branches of Banco Popular POP.MC opened their doors on Monday morning, the bank’s chairman Emilio Saracho still hoped the 91-year-old lender, once the most efficient in Europe, could be saved.

A man uses a cash dispenser at a branch of Spain's biggest bank Santander next to a Banco Popular branch on the same day Santander announced that it would buy struggling rival Banco Popular for a nominal one euro after European authorities determined the lender was on the verge of insolvency, in Madrid, Spain June 7, 2017. REUTERS/Juan Medina

The previous Friday, shortly after Popular suffered another selloff on the stock market, he had sent an email to the bank’s staff to tell them it was solvent and they should keep working hard to overcome the current situation.

“We need to work together and believe in what we do,” Saracho wrote.

JP Morgan and Lazard, which had been advising Popular since early May on finding a merger partner or raising new capital, had spent the weekend working the phones with other Spanish lenders in a bid to find a last minute solution.

And the bank had requested emergency central bank liquidity that it believed meant it had a whole week to review its options and try to draw a line under a deposit flight that had wiped a quarter of its deposits.

What Saracho didn’t appear to measure was that the fate of Spain’s sixth-biggest bank would be sealed in hours, not days or months as in previous European banking meltdowns.

The swift maneuvering by Europe’s bank regulators marks a sharp and brutal change in the way they deal with struggling banks, which could become a blueprint for handling other cases, especially in Italy where the rescue of troubled lenders has been under discussion for months.

Previous bank rescues in the euro zone have involved protracted negotiations and government bailouts, even after new rules came in following the financial crisis, aimed at preventing taxpayer money being used in bank bailouts.

However, the abruptness of the action by the authorities could raise questions about whether regulators and the Spanish government spent enough time exploring other options potentially less painful for shareholders or bondholders. That, in turn, could now pave the way for legal claims to be filed.

The ECB, the Spanish government and Popular all declined to comment.


On Saturday, the Single Resolution Board (SRB), a regulatory body responsible for dealing with the euro zone’s banking crises, met in Brussels to discuss the risks posed by Popular for Spain’s and Europe’s financial stability.

Based on an independent valuation by Spanish boutique investment firm Arcano which showed Popular had a capital shortfall of up to 8 billion euros, the SRB concluded the bank would likely fail to meet its financial obligations.

It ordered an immediate fire sale, setting in motion the mechanism to take over the lender.

“Saracho was left by the side of the road by the European resolution body,” said one source, adding that JP Morgan’s last-ditch attempt at the weekend to find a buyer was predicated on an understanding that the SRB would soon move on Popular.

    The SRB declined to comment.

    Sources familiar with SRB strategy say the initial objective was to intervene in Popular on Friday, June 9, ahead of the weekend, to give enough time for negotiations.

    But both the volume of deposit withdrawals on Monday and the determination of European authorities to use their new banking resolution powers would speed things up dramatically.

    In the early afternoon of Tuesday, Saracho picked up the phone to call Spain’s Economy Minister Luis de Guindos and let him know Popular had run out of collateral to obtain new ECB liquidity. Branches might not open on Wednesday morning.

    “There was a bank run,” the ECB’s deputy governor Vitor Constancio said on Thursday in response to questions about why the authorities had not spent more time analyzing other options to salvage the bank.

    It was no longer a question of making sure the bank had enough capital to meet its long term obligations, so much as ensuring it had cash on hand to stay open.

    “It was not a matter of assessing the developments of solvency as such, but the liquidity issue.”

    Within six hours, the SRB had swooped, cancelling the investments of Popular’s shareholders and junior bondholders with the stroke of a pen and selling the lender for a solitary euro to Spanish banking goliath Santander (SAN.MC).

    Additional reporting by Carlos Ruano, Francesco Canepa in Frankfurt, Francesco Guarascio in Brussels and Pamela Barbaglia in London; writing by Julien Toyer; editing by Peter Graff

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