“Bail-In” Era for Europe’s Banking Crisis Begins

Many Banco Popular investors wiped out. Taxpayers off the hook. What it means for Italy.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

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.

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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  91 comments for ““Bail-In” Era for Europe’s Banking Crisis Begins

  1. greg says:

    Good article.

  2. Jim C says:

    I am glad to know. I figured there will another Greece and Cyprus event all over EU. Thank you.

    • Vespa P200E says:

      Indeed as contagion spreads to the rest of the PIGS. Starting with 1st PIGS poster child Greece to Italy and Spain. Next up Portugal? Yep day the reckoning sooner than later thanks to banking dominos…

    • cdr says:

      A Eurozone that acts responsible financially? Stalling replaced by thoughtful action? Unbelievable, yet one example exists now. Is this the start of a trend or is it a desperate act not to be repeated for a long time?

      Actual costs were imposed on the people who textbooks say should bear the cost. This is NOT the typical way of the Eurozone …. borrow, print, spin theories and excuses, ignore and stall (Stall is technically an action while ignore takes even less effort). Then make the people with the least influence and least recourse against authority pay the most if actual savings must be spilled.

      Perhaps there are actual limits to the Eurozone ability to launder ECB cash. Or, perhaps they were overwhelmed by the British distraction and forgot to put in the proper number of hours thinking up a new way to stall. Or maybe the bank investors who got cleaned out were mostly Trump supporters and they were being taught a lesson for Trump’s telling the EU to take a hike on the phony Paris Environment agreement.

      I personally there will be a lot more Eurozone kick the can before we ever see this type of responsible behavior again. Yesterday was a last resort action. The Eurozone will cease to exist when ECB QE ends … unless the Eurozone decides to finally pay its way and live within its means. Preposterous.

      • Well put.

        Or maybe it is just that “people with the least influence” are now the investors.

        The story that poor people have to skip meals and fold over their earnings to prevent wealthy people from moving their money is good one time every 50 years or so. Then it produces some wtf but it wont trigger pitch forks.

        If preventing rich people from moving their cash is so important government can attempt to write laws to prevent it.

        I’m not saying that would work but there is no reason to think folding over poor peoples earnings to them prevents them from moving their cash. There is no correlation. You can give people any amount of money without that mechanism preventing them from moving that money.

        Personally I think it would be easier to move your money out of the country if you just give it to me?

        Am I missing something?

      • d says:

        “Unbelievable, yet one example exists now.”


        So what do you consider the two bail-in’s in Cyprus as ?

        • Wolf Richter says:

          Cyprus was totally different. It wasn’t done under any EU bank resolution regime (it didn’t exist at the time). Cypriot banks didn’t issue bonds. So there were no bonds to bail in. They relied on deposits for funding, and they had lots of deposits from Russia, a huge amount compared to how tiny the country is. But there were no deposit insurance funds to speak of. And since Cyprus was such a cesspool of corruption (read my early articles on this), these deposits disappeared which caused the banks to collapse. Banking supervision in Cyprus was a joke.

          Due to the magnitude of the deposits and the tiny size of the country, the taxpayers in Cyprus were too few to bail out the depositors.

          So taxpayers in other countries bailed out depositors in Cyprus up to a certain limit. Deposits above those limits were bailed in, which meant that the depositors got shares in the new banks, instead of their deposits.

          The mess in Cyprus was in part the reason for establishing an EU banking supervision entity with teeth and a regimen for resolving failed banks. This new regimen has now been put to the test for the first time ever.

        • d says:

          Yes we know all of that.

          This Spanish event puts to bed the Theory/Claim that the Eu bail-in in Cyprus, was just a way of robbing the Russian Oligarchs.

          Yes what became the Eu Bail-in regulations were fully formulated after Cyprus.

          Interesting that you dont Regard Cyprus as the # 1,2 ground Zero for what became Eu bail-in regulations.

  3. Halcyon says:

    I seriously wonder if the majority of Californians would even notice a banking collapse when it does happen here.

    The only thing they might notice is that their debit card is a different color of plastic tomorrow. I’m doubtful that the digits in the accounts will actually change at all. Helicopter Yellen will just push digits into the accounts.

    People might whine about gas and groceries suddenly going higher but that’s about all I expect to see. The concepts of currency vs store of value are just …lost.. on most people.

    Sometimes I regret that I bothered to try educating myself on economics.

    • Vespa P200E says:

      Go outside wealthier enclaves in coastal Cali and I hear it’s EBT-land galore…

      In the old days folks who used food stamp appeared to be poor but as observed by Victor Hanson of PJ Media at grocers in Central Cali the today’s EBT recipients all seemed to tote smart phones, drive 5-10 yr old cars and dressed not too shabby. Not to mention ILLEGAL aliens get EBT cards…

      • Meme Imfurst says:

        How else do you keep 106 million unemployed from rioting?

        You want to see abuse, come to Florida. Only here they drive new cars.

        Got a job? You are paying for it. I read that Alabama now requires an able body person to work if they want assistance. I am sure some group will find hatred and discrimination to scream about.
        Food stamp recipient numbers are down 83% since the enactment.

        Why work if Uncle Sam can support you. I am tired of people who scream they are being held down when they have more opportunities to succeed than I do or even did.

        • Frederick says:

          Lots of people collecting benefits and working for cash I know personally a Romanian couple who live in a two million dollar house Rent it for the summer for 60 K and use Medicaid How they do it is a mystery to me Another Polish guy got his girlfriend pregnant so he married her and the delivery was on the taxpayer Gone are the days of taking responsibility for your actions thanks in part to grifters like the Clintons

        • JMiller says:

          Meme Imfurst,

          Where are you getting 106 million unemployed? If it mostly from the 95 million who are in the “Not In The Labor Force” category then I need to inform you that many of those people are not really unemployed. Most of them are retired persons, school students, stay-at-home moms and disabled persons.


        • walter map says:

          To say nothing of the welfare of the wealthy enjoyed by corporatists, an order of magnitude greater, in addition to immunity from prosecution.

          Austerity = sadism.

          Love the handle, by the way.

  4. nick kelly says:

    Five hundred banks?

    OK, Canada, with what is always considered among the most stable systems, has 5 majors. (Ya I know they are exposed to RE, they got through the 80’s crash and hardly blinked in the 2008 sequel. No one lost a cent in a Canadian bank during the Depression)

    So Italy has more population, but not a bigger economy. Allow a bit for Latin whatever and it should have at the MOST 50 banks, not 500.

    Twenty would be better and would allow major savings, shared IT, RE, etc.
    Job losses? Yes, sorry, but a stable banking system is a prerequisite for growth in the rest of the economy.

    This situation screams for consolidation via mergers BEFORE there is no alternative.

    Let’s hope the disappearance of Popular ‘encourages the others’ to join forces and survive together rather than dying separately.

    • nick kelly says:

      PS: sorry there are 6 majors, I forgot HSBC, but only a handful of minors. Total allowed to take deposits is I believe less than 12.

      • robt says:

        A lot of the Canadian minor banks were ‘merged’ or ‘bought’ in the collapse of the early ’90s. An example: Bank of BC was bought by HSBC for a dollar and received 100 million from the government for doing so.
        I looked at a bank publication in the waiting area of a bank around that time, and upon a quick inspection of a list of association member banks found that about a third of them no longer existed.
        After 2008-9, over 100 billion was pumped into the banking system by the government and even the US Fed, but the myth of the Canadian banking system lives on.

        • robt says:

          I should have been clearer: the Bank of BC was actually taken over in 1986, not included in the early ’90s.

    • Wolf Richter says:

      The US has over 5,000 FDIC-insured banks, down from over 14,000 in 1985. Small banks are good because they don’t cause systemic problems when they collapse. And a lot of times, they offer much better service than the big banks, higher deposit rates, lower fees, etc. But big banks hate them them because they hate competition.

      • nick kelly says:

        During the Depression several thousand US banks went under taking deposits with them. Not a cent lost in Canada.

        In the run up to the 1980’s crash, Clinton buddy McDougal bought a bank with a few hundred thousand up front, which would be considered a literal joke in Canada, even at the time about the price of a McDonald’s franchise.
        If memory serves it wasn’t even an S&L it was an actual bank, which immediately acquired a major client, McDougal’s dicey real estate gambles.

        The S&L crash alone eclipses ANYTHING that has happened in Canada since 1926 when the failure of the Home Bank caused the last depositor loss.
        Granted, S&L deposits were safe but not the taxpayers.

        During the 2008 Financial Crisis the US banking system almost collapsed again. unlike the Canadian system.

        It couldn’t be bailed out via mergers, the Fed had to provide the means and still owes some of it. There was no equivalent in Canada, the banks remained solvent without government money. (Of course the BOC always had standby credit available.)

        I’m all for small in all kinds of businesses, just not banks.
        And I was commenting on Italy, where is the equivalent of the Fed for Italy? There isn’t one. Mark to market has arrived. In the case of Spain’s Popular, it’s one euro.

        Re: competition. I don’t know about business loans, but in mortgages the C banks are very competitive, maybe too much so.

        Given that the C$ is not as stable as US$, the 2.9 % 5 year rate
        has to be almost a loss leader. They need to make it up on other business.

        Is this Italian house of cards better or worse because there are five hundred cards instead of fifty?

        • nick kelly says:

          ‘Small banks are good because they don’t cause systemic problems when they collapse’

          No doubt it’s better to have a small bank collapse than a big one, but the Canadian system is skewed ( with a price) to the idea of banks being so few and big that a bank collapse is almost unheard of.
          The last case in Canada of a chartered bank needing to be taken over was in the 70’s when HSBC took over troubled Bank of British Columbia.
          Most Canadians don’t what a bank collapse is.

        • Wolf Richter says:

          “During the 2008 Financial Crisis the US banking system almost collapsed again…”

          It was the megabanks that caused the problem. Hundreds of smaller banks were wound down by the FDIC, investors were wiped out, and depositors were made whole.. without any problems. Some large banks too were wound down, like WaMu and others without a problem. Taxpayer didn’t pay for any of it (FDIC isn’t using taxpayer funds… it’s funded by bank fees). But the large banks got bailed out by the Fed (lender of last resort) and by TARP (taxpayer).

          Canada didn’t have a housing bust during the Financial Crisis. That’s something you’ll get sooner or later, and then keep an eye on your banks and on your mortgage guarantors.

          The problem in Italy isn’t that banks are small. It is that banks are corrupt, that politicians are corrupt, that banking supervision is at best lackadaisical, if not aiding and abetting in the corruption… banks controlled by some figures lend money to a some figures and never seriously demand the money back… and then the collateral doesn’t exist or is gone… a million things. It’s a cesspool. That’s why it is such a POLITICAL problem in Italy to wind down even a small bank and let the truth emerge as to what was going on inside.

      • RD Blakeslee says:

        Banks (big and little) hate Credit unions even more than big banks hate little banks.

    • Maximus Minimus says:

      You obviously did not count the number of high interest savings account CDIC insured mostly online banks. There are more lenders than banks with
      big shiny offices. Any of them can suffer a bank run, although only figuratively.

    • SimplyPut7 says:

      Big 6 Banks: RBC, BMO, Scotiabank, TD, CIBC and National Bank. Most of the other banks in Canada (not including credit unions) are each a massive account held inside of one of these 6 banks.

      The only reason we appeared more stable was because we did not de-regulate our banks. Our last prime minister (Stephen Harper) did want to de-regulate banks to be more competitive like the US banks, which were experiencing large growth and increasing revenue before the financial crisis. But before he could get the chance to open the argument again, as a minority government leader, the world fell apart.


      So boring Canada looked very stable because we are a do-nothing country when it comes to our banking system. Which most of us in Canada do like.

      I do like the way this bail-in was carried out, where shareholders were held responsible for the poor choices the bank made. This would hopefully cause larger shareholders to take a more active role to ensure they don’t lose their stock value as well as cause executives with stock options, to be more prudent if they realize bail-outs are a thing of the past.

      The word bail-in is still a bit scary considering what happened in Cyprus. To have depositors who have no voting rights pay for the mistakes of shareholders and bank executives, still worries people around the world. If federal government have in writing (legislation, acts, bills etc.) that they won’t go after depositors. I think bail-ins could be the new normal.

      The bail-in of Banco Popular seems too good to be true. Considering how long the recovery from the financial crisis has been around the world, I think it will take some time for people to trust their government that this new method of containing risk will work.

      In Canada, there were closed door meetings with the major banks to create the bail-in bill, but since we have not had to use a bail-in in Canada, we won’t know for sure how this will be implemented or if there are any unintended consequences from this risk measure.


      • George McDuffee says:

        RE: The word bail-in is still a bit scary considering what happened in Cyprus. To have depositors who have no voting rights pay for the mistakes of shareholders and bank executives, still worries people around the world.
        I think this had more to do with who many of the depositors were and where the money came from than anything else. For example the Russian Mafia and systemic tax evasion. Tough on the honest depositors with legitimate funds though.

        • d says:

          Send’s a simple message if you are lucky enough to have an FDIC (they quietly took ours away) dont keep more in that institution than than just under the FDIC limit.


    • jb says:

      Canada ..a stable banking system..how is it that many do not know that Pierre Trudeau stopped government infrastructure loans from the Bank of Canada INTEREST FREE…..the supreme court has just released their judgement in the lawsuit initiated by Canadians to forse the government to go back to getting interest free loans from the bank of Canada…the court said this is a “political issue”…. http://www.socred.org/index.php/blogs/view/the-case-to-reinstate-the-bank-of-canada …and now Justin Trudeau is creating a new bank behind closed doors with Goldman Sachs to sell our infrastructure to the highest foreign buyers….

  5. bkennedy says:

    Canada passed an omnibus bill in 2014 pointing towards bail ins to avoid A repeat of the 114 billion bailout of our big five due to toxic mortgage debt. However Canada categorically denied that that bailout happened unless you check Hansard record in 2012

    • nick kelly says:

      The Fed extended credit to the C banks early in the 2008 crash when nobody knew what was happening. The context here is Lehman gone, GM and Chryco TU, Citi not too good and Goldman having to be turned into a bank holding co so it could be bailed out ( see Vanity Fair: The Week Goldman Almost Died)

      The credits weren’t needed. The C banks don’t owe the Fed a cent.

      Since there was no RE crash in Canada, where would the ‘toxic mortgage debt’ come from?

      Hansard is a record of what is said in Parliament- which is known for its share of nonsense. It’s not any kind of audited report on the banks.

      US short sellers targeting the C banks since 2008 have had their asses handed to them over and over.

      Come up with a link showing a C bank in trouble anytime since 2008 and I’ll take a look.

  6. Gershon says:

    Shareholders who bought into these insolvent banks expecting a taxpayer bailout deserve to get their heads handed to them.

    Under no circumstances should another Cyprus-style bail-in of depositor accounts ever be allowed anywhere. Let insolvent banks go under.

  7. chip javert says:

    Who were the Spanish investors owning Popular’s co-co & equity? Were they all (or substantially all) mom & pop little guys?

    • Wolf Richter says:

      PIMCO et al (huge funds and family offices)

      • Willy2 says:

        – Were they also “chasing yields” ? with leverage ?

      • RSDallas says:

        So should we see some US share selling to offset the Spanish losses? Also, Spain bailed in because the investor capital was at a level that made it worth Santanders efforts. Doesn’t it signify that the balance sheet of Paschi is in fact far more rancid than Spains?

        • MC says:

          The problem with Italn banks’ balance sheets is very simple and all hinges around collaterals.

          The vast bulk of Non Performing Loans (NPL’s) held by Italian banks are backed by real estate, whose book values have been kept artificially inflated for years, thus driving interest payments way way down.
          Italy may have not had a RE burst in decades, but this doesn’t mean since 2014 values haven’t started to buckle in most markets under the strain of unsold (and growing) stock. To this it must be added banks periodically and suddenly “discover” a dilapidated warehouse with no roof in the middle of nowhere or a crack house next to one of Italy’s poorly kept and congested roads is not “prime real estate”.
          As one of my professors would have said “there’s a lot of rascality associated with this business”.

        • Wolf Richter says:

          PIMCO is huge ($1.5 trillion in assets) and its $200+ million in CoCo bond holdings from Popular (if it held it to the last minute) are tiny by comparison. So this is routine for them. These huge bond funds have small losses like this all the time. That’s their business… take some risks, win some, lose some.

  8. Spanky Bernanke says:

    Hmmm? If we bail-in one midsize bank, that may create a bankrun into the TBTJ banks, like Deutsche? WOW! That sounds so much easier than waiting for Washington Mutual and Wachovia to fail due to the bad mortgage-backed securities that the TBTJ banks created strategy! This is a false flag, people. They are forcing the smaller, competitive banks to merge with the big so that the ECB and other bureaucrats can more easily control and rig interest rates TO MAKE DAMN SURE THE FRACTIONAL RESERVE BANKING SYSTEM DOESN’T DIE.

    • nick kelly says:

      All banks are fractional reserve and always have been. Do you expect a bank to have 100 % of deposits on hand? Where would the money for loans come from if it can’t use deposits?

      Jimmy Stewart gives a thumbnail if somewhat dramatic defense of why banks don’t have all deposits on hand in ‘It’s a Wonderful Life’ where he makes a speech to the town folk who are engaging in a run on his bank.
      They are yelling: ‘Where is my money!”

      The only question about FRB, or more simply banking, is what fraction should it have on hand.

      • Klaus says:

        How about 100% for those folks who just want security (paying a fee for it) and mediums of exchange (paying a fee for it)?

        How about 10% for those folks who want a return on their money?

        Yes, credit would dramatically shrink. But also inflation, moral hazard, banking crisis.

        And savings would again direct investment, instead of creating credit (and invesment) out of thin air.

        In short, how about a Glass-Steagal for bank liabilities?

        • nick kelly says:

          How would the fee ( or 10 % return) be created if not by lending the deposit to an enterprise? You are asking for something to be created out of nothing.
          Note: the patent office will no longer consider perpetual motion applicants. Everything has to come from somewhere.

          In the case of banks, by making GOOD loans with the deposits.

        • Klaus says:

          nick kelly

          I guess I miss-write my thought. This is what I meant:

          100% reserve for those folks who just want security and medium of exchange for their money. No return on this money and payment of a fee for such security and medium of exchange

          10% reserve for folks who are willing to lend the bank the money so they can loan it to others. Certain return on these folks’ money as they are taking certain risk.

          So you create fractional reserve banking ONLY for the money deposited by folks willing to take the risk

        • nick kelly says:

          I get you now Klaus. But I think if someone wants security above all they can get a trickle of income from US T-bills. Not much but no fee, unless of course you count inflation. And you have to tie the money up for 3 months.

          But this no real return on absolutely secure securities, including cash is what it is.
          Because I’m psychic, I suspect a familiar chirp that T-bills aren’t 100 percent secure. True, they are just the most secure.

      • John Doyle says:

        No longer any such thing as fractional reserve lending. It’s now called Credit Creation theory [according to Richard Werner]. Banks do not use reserves for lending. They just have to show they are solvent. Bank loans come from thin air, but, unlike the Fed. they are liabilities.

        • Rusty Brown in Canada says:

          Actually the bank’s loan portfolio is an asset on the bank’s balance sheet: Loans Receivable. It’s only a liability on the borrower’s books.

        • John Doyle says:

          Well, there are 4 entries, two per side. The bank’s asset is the loan document, the customer has the money. The bank has a liability, having lent the money and the customer has a liability, to pay back the loan. It’s called double entry book keeping. Conveniently, the source of the loan doesn’t figure. The sum just gets marked up by typing it into the customer’s account.

        • d says:

          Conveniently, the source of the loan doesn’t figure.

          Part of it does somewhere as part of it is the % of a deposit and a % of shareholders fund’s. Both referred to as cash reserves.

          In the fractional reserve ration

          Which is still far to low, in most places.

        • Rusty Brown in Canada says:

          John Doyle: with a perception such as that, I don’t think you should be giving bookkeeping advice to anyone.
          I know whereof I speak.

        • bev kennedy says:

          I think this is an interesting train of thought. There is also the matter of shadow banking that doesn’t show up on the books and thus usnt included in the government’s audits of robustness

  9. Hiho says:

    Wolf, taxpayers are going to pay for that indirectly. The adquisition of popular came with future deductions of taxes that amount to 5200 millions of €.

    I guess that we have been f*cked again.

  10. Jon says:

    The article sounds for sure damning
    But what is the impact on the ground..
    Is it gonna stop the mad appreciation of stocks and real estate and bring them back to meaningful valuations ?

    • Maximus Minimus says:

      I think, a slow moving train just got going. Moral hazard cannot be ignored completely any longer.

      • TJ Martin says:

        Much as I agree with you personally .. in light of the present global reality distortion , delusional optimism and blind faith in much of nothing at all not to mention currency manipulation etc – et al – ad nauseam ( emphasis on ‘ nauseam ‘ ) … I’m not so sure moral hazard still exists .. never mind plays much of a role anymore .

        My best guess .. and I do mean guess is … it’ll take some event / tragedy of epic proportions to bring reality and morality back into play in the financial world . Till then its all aboard the LaLaLand Express … with err .. ” Casey Jones ” in control

        • Petunia says:

          Moral hazard is always in play, it can be ignored, but it injects rot into the system which leads to collapse. Eventually somebody or everybody pays for the criminality.

        • Maximus Minimus says:

          Unfortunately, have to agree with you. Specifically, I have a feeling that one day vultures will start circling Santander given it’s reputation in the US which was also reported here. There is likely a pattern there with regard to it’s global operations.

    • MC says:

      As Banco Popular has always been heavily involved in commercial real estate (CRE), their demise is likely to have immediate consequences for the Spanish CRE market , at least until the dust settles.

      Always remember real estate is highly local, so the consequences of any banking crisis are not felt in uniform fashion: to stay in Spain the frantic attempts by every player to reflate the housing bubble are not leading to the much anticipated boom many expected. Yes, asking prices have gone way up since 2014, but few are buying, partly because of the many problems associated with mortgages and RE loans in Spain today and partly because unsold stock is not merely large, but growing as banks have opened the spigots to construction firms again, especially in coastal areas.

  11. anthony hall says:

    Frau Merkel just said that the EU can`t rely on US/UK any more because of Brexit. The EU can rely on Germany to bleed Southern Europe white by depressing the value of the Euro.

    • Frederick says:

      Hey at least my summer holiday in Eastern Europe will remain affordable to me as a holder of the greenback Thank you Mr Dragonski

    • TJ Martin says:

      Pardon me but what Merkel actually said was that the EU can no longer depend on the UK because of BREXIT nor can they trust or depend on the US because of our current political situation and that from this point on France and Germany will need to lead the EU [ not bleed fiscally irresponsible southern Europe dry ] with China assuming the mantle of Global leadership

      • nick kelly says:

        This stuff about Germany bleeding the south by depressing the euro is of course complete nonsense and reflects the ubiquitous paranoia of those who have to see dark forces everywhere.

        Germany didn’t create the mismanagement, chaos and corruption in Greece, Italy and Spain, which is dragging down the euro. All three were doing that long before the euro existed. But with entry to the euro with the ECB (read: Germany) giving them a much lower interest rate, they’ve spent the last few years being more profligate than usual.
        After admission Greece really handed out some goodies. The hundred- plus list of jobs qualified for early retirement at 55 in Greece includes hair dresser, disc jockey, etc.

        As for Germany’s presence in the euro zone depressing the euro, what would it be worth if Germany left and went back to the D-Mark?

  12. TJ Martin says:

    ” ….. on the grounds that the Italian lender was not insolvent, just liquidity challenged ”

    In any other discipline ( except politics ) you’d either be tossed out the door or locked up in the loony bin for making such an obviously ludicrous self contradictory illogical statement .

    Nuff said .

    • JL says:

      haha – agree

      But such is the challenge when a “generalist” writes about a specific topic. Still a decent article if you know how to nagivate through those pitfalls.

  13. TJ Martin says:

    ” on the grounds that the Italian lender was not insolvent, just liquidity challenged ”

    If someone were to make such a blatantly self contradictory ludicrous statement such as this in any other realm [ politics excepted ] they’d be tossed out the door on the grounds of incompetency with professional help being highly recommended

  14. Petunia says:


    Can taxpayers in Spain or Italy write off losses like those sustained in this bank failure?

    • Wolf Richter says:

      I can’t answer your question, I just want to add this:

      A lot of those investors are not in Spain and are therefore not subject to Spanish tax laws, such as bond funds (including PIMCO), wealthy families in South America, and hedge funds that tried to make a buck on those bonds. Day traders that played with Popular’s penny stock could be all over the world. So I don’t know what portion of the losses is actually subject to Spanish jurisdiction.

      If Santander takes a loss on the deal, it will be subject to Spanish jurisdiction and will reduce its taxable income. But it also got all the good assets which are producing interest income (and it probably got them at a discount). Since Santander is profitable, this new interest income is subject to taxes. I would assume Popular was not profitable in recent times and its interest income from those good assets got more than wiped out by its losses elsewhere.

      • Spaniard says:

        Well here is the answer. Yes, Santander will be able to reduce its taxable income in 5300 millions more thanks to having bought popular. That is because of the “activos diferidos”. I do not know how to exactly translate it, but think about it as a christmas present from our gov to the banking sector.

      • d says:

        “Since Santander is profitable, this new interest income is subject to taxes.”

        Untill they start writing off all populars and more of their own NPL’S against that extra profit, and if they aren’t WHY NOT

    • Don Quijones says:

      Tbh with you Petunia, I haven’t got the foggiest. That said, I’m meeting up with a friend of mine tonight who is both an accountant as well as a former employee of one of Spain’s biggest banks. Will put your question to him, see if he’s got an answer.

      • Klaus says:

        I believe than, unde tax regulation for retail investors, if I take a loss in my investment (say I bought Popular shares at 0.30 and have therefore lost tohe 0.30 per share), I can offset gains in other stock investments with these losses. If losses are greater than the profits I would have a few years to offset profits with these losses

        Similarly, Santander will certainly book huge losses from Popular and believe they may offset profits with these losses. If losses are greater than the profits, it has a number of years to offset profits with the carrying losses

  15. Jon t says:

    “Surprised” that Banco Popular didn’t make it. Stresstest was not that negative. Article is in Dutch, stresstest list is easy to read, buffer and banks are the same words here.


  16. JL says:

    On the point of contagion in Spain being limited – Liberbank’s equity is falling 17.5% today, taking the decline in the last 5 days to 31%.

    Their T2 debt is down 10pts in 3 days.

    Even in Spain you have contagion. Never mind Italy – it would be far greater with all retail sub bondholders.

    • Klaus says:

      As of now, add further 17% falling share price, amounting to some 50% decline in last 2 weeks.

      However, this is a small fish.

      For a bigger fish, I would think of Sabadell.

      • JL says:

        It’s not about being small fish. It’s about what authorities did with Popular – imposed losses on debt even though the bank had positive NAV on going concern basis. This spooked everyone. Makes no sense to hold sub-debt in weak banks.

    • Stevedcfc72 says:

      Liberbank balance sheet is about a quarter of Popular’s. Looked ten minutes ago its 32% down today another mid-size bank which is going to be taken over. Whilst Popular being taken over had to be done, the message that has gone out to the smaller Spanish Banks is that they will not be able to compete with the bigger Spanish Banks, income-profits will not be going up anytime soon.

      Popular has definitely spooked some elements of the Spanish Banking Sector.

      • d says:

        Everything is good its all government (Taxpayer ) backed and they wont let anything bad happen to us..

        Until they finally start doing what has to be done.

        Some small fish that are not well, will now die.

        Sadly one or two healthy ones may also get killed in the move to reality.

        In the log term this is good for Spain and the Euro.

        Once the process is finished in Spain the bell must toll, for Italy.

        The some moment to closer banking union, could be more than just Talk.

        As for a Euro zone bond not until State debt and budgets are in Sync.

  17. Wilbur58 says:

    Forgive my ignorance, but I just don’t understand fully how this is a good thing.

    I see a positive in that a free market company has failed and will go out of business with no public support.

    But what about Santander? Yeah yeah, they’re taking on more dead assets. But still, they have one fewer competitor and more assets. What debts are they taking on from Popular? Maybe some are to themselves? Balance sheet write down, but no cash pain.

    Can someone please give a thorough explanation on how this wouldn’t be a big positive for Santander? (If I heard Chase bought a struggling bank for $1, I’d know damn well they’re getting a great deal somehow.)

    • Willy2 says:

      – The junior creditors saw their bonds go up in smoke. It means that Santander now has fewer creditors (think: interest payments) and no shareholders (think: dividends).

    • Wolf Richter says:

      It is likely a good thing for Santander – it is gaining all those small-business customers from Popular and it’s getting rid of a competitor – or else it would not have done it. It bought those assets at a discount, it looked at them long and hard and made its decision. As has been suggested in the comments here, there may also be tax benefits. But whether it’s good or not good for Santander hasn’t been addressed in this article, and it’s really beside the point for the article.

      The key point in the article is that the bank bailout regime in Europe has changed, and that from now on, investors (stockholders and junior bondholders) in a failing bank will actually bear the first losses, rather than taxpayers, and that taxpayers will no longer be automatically shanghaied into bailing out these investors. And that would be a sea change in Spain and Italy, if it is applied to future bank failures.

      • Stevedcfc72 says:

        Yes Wolf Richter good news shareholders and junior bondholders bear the first losses.

        The story with the Spanish Banks currently is that any bank failure hits the confidence of the normal person in the street.

        El Pais a newspaper in Spain post Popular and in relation to Liberbank who’s shares have tanked this week is using contagion in a lot of the article on the current situation.

        Unicaja (8th Biggest bank in Spain) is under scrutiny also. Ironically on 1st June the bank released an article about floating on the stock exchange.

        With the smaller banks the trend has been that a lot of depositors with these banks have taken their money out of the bank. 7% for example in one bank for one quarter alone. Substantia

    • nick kelly says:

      Can you explain why it being ‘a big positive for Santander’ is not ‘a good thing’?

      The key requirement for any economy is not that there be an independent bank on every street, along with the butcher and the baker.

      It is that the banking system is STABLE.

      In this case the deposits are protected.

      If no bank took over Popular, either the deposits are lost or the state has to cover them.

      How would that be ‘a good thing’?

  18. KFritz says:

    ‘..senior bondholders and depositors spared.’ Do they receive 100% of investments and desposits? If I was a Santander senior bondholder, I’d be comforted that my investment was guaranteed if Santander should fail, but annoyed, for the short term at least, that I was subsidizing Popular’s ‘unlucky’ investors.

    Depositors deserve 100%, but it seems fair to me that even major investors need to be gifted with a ‘haircut.’

  19. Stevedcfc72 says:

    I keep hearing small bits of news about the Italian Banking sector. One I heard today is that Generali are refusing to financially support any monies towards the two Veneto banks.

    I know the Italian government want the bigger financial players such as Unicredit to support the failing banks but surely they still have their own problems also.

    If the bigger financial players pull out of any support, the Italian Government under EU rules can’t bail them out, Qatar now have their own problems so won’t get involved, where does that leave these zombie banks?

    Has anyone else heard anything on these Italian banks?


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