Banco Popular burnt through €3.6bn in two days ahead of rescue

Banco Popular burnt through €3.6bn of emergency central bank funding in the first two days of this week as the Spanish lender suffered the eurozone’s first large-scale bank run, according to two people involved in the situation.

The eurozone’s nascent regime for handling failing banks was dealt its first big challenge when a steady trickle of customers pulling money out of Popular turned into a flood over the past few days as its attempts to find a buyer stalled.

The Spanish lender, weighed down by €37bn in mostly toxic property loans, was forced to tell authorities in Madrid on Tuesday that it would be unable to open the next day without a rescue deal to shore up its rapidly evaporating liquidity.

By 3pm Madrid time on Tuesday, it was clear to supervisors in Madrid, Brussels and Frankfurt that Popular did not have enough high-quality loans left to use as security for additional central bank assistance.

So European regulators took control of the struggling bank, wiping out its shareholders and junior bondholders, before selling it for a symbolic €1 to its bigger rival Banco Santander, which was the only bidder in the overnight sale process.

“The reasons that triggered that decision were related to the liquidity problems,” Vitor Constâncio, vice-president of the ECB said on Thursday. “There was a bank run. It was not a matter of assessing the developments of solvency as such, but the liquidity issue.”

The way Popular was rescued has provided a potential template for dealing with Europe’s other problem lenders, including two mid-sized banks in the Veneto region of north-west Italy, which have seen their liquidity plunge after a financial mis-selling scandal.

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Most investors have praised the quick and decisive rescue of Popular, which left senior bondholders and depositors unscathed and avoided any contagion in debt or equity markets.

Santander shares, which fell 2 per cent on Wednesday, shot up nearly 5 per cent on Thursday as investors digested the rescue news.

But they have focused their ire on Popular’s management, led by Emilio Saracho, an investment banker who joined from JPMorgan after Popular reported a €3.5bn annual loss in February.

They cited Mr Saracho decision to announce at the bank’s annual meeting in April that it needed to raise capital without giving detail on how it would achieve this.

They also asked why the Popular chairman seemed so intent on selling the bank, especially when his former employer Santander was the natural acquirer.

One investor in Popular’s bonds questioned why the bank did not launch a share issue to plug its capital shortfall once its attempt to sell itself floundered last month.

“Investment banks like Deutsche Bank were lining up to underwrite a €4bn rights issue for Popular and I was trying to tell them that I would have supported it,” said the bondholder. Deutsche declined to comment.

Italy has been locked in talks with European regulators trying to agree a state bailout for the Veneto banks, Banca Popolare di Vicenza and Veneto Banca, which could be put into resolution by the end of the month if a solution is not found quickly, according to people involved in the talks.

Pier Carlo Padoan, Italy’s finance minister, pledged last month that the banks had all the liquidity guarantees necessary amid concerns that more deposits would flee if talks with the EU drag on. Rome is in talks with the country’s two biggest lenders, UniCredit and Intesa Sanpaolo, about them investing in the two troubled lenders.

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Jean-Pierre Mustier, chief executive of UniCredit, is leading talks between Italy’s banking system and its Treasury about Italy’s lenders stumping up a further €1.2bn to cover the incurred losses which need to be paid by private money before a precautionary recapitalisation could kick in, said people close to the talks.

The Veneto banks have a combined €28bn in deposits. If they failed, €11bn would be needed to be covered by the deposit guarantee scheme and paid for by Italy’s banking system.

People involved with the talks said that Italian bank bosses were warming to the idea of footing the €1.2bn rescue bill as it would be significantly lower than funding the deposit guarantee scheme.

Genoan bank Carige, another troubled midsized lender, also faces a potential risk of resolution if it fails to bolster its balance sheet, said people familiar with the matter.


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