What would a disorderly bank collapse in Spain and Italy have done?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
New information has revealed just how serious a threat a disorderly collapse of Spain’s sixth largest bank, Banco Popular, might have posed to Spain’s banking system. In its final days, Popular was bleeding deposits at a rate of €2 billion a day on average.
Much of the money was being withdrawn by institutional clients, including global mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils, prompting accusations that Spain’s government was using insider knowledge to withdraw large amounts of public funds, which of course hastened Popular’s demise.
All the while, Spain’s Economy Minister was telling the bank’s less privileged investors, including retail shareholders and junior bondholders, that there was absolutely nothing to worry about. Those that believed him lost everything.
Between the end of March and its last day of trading, Popular shed €18 billion of deposits, roughly a quarter of the total. On the night of June 6, Europe’s Single Supervisory Mechanism decided that the bank could no longer cover its collateral. Popular, warts and all (take note, Italy), was sold for the meager sum of €1 to Banco Santander, though Santander will have to raise €7 billion of fresh capital to fully digest the bad stuff on Popular’s books.
According to the newly published report, the run on deposits did not end with Santander’s shotgun takeover of the bank. The day after the operation — a Wednesday — the money kept pouring out. The same happened on Thursday. On Friday, the deluge slowed a little. By Monday, the tide had finally turned, industry sources say. On that day, for the first time in a long time, Popular’s accounts witnessed more deposits than withdrawals.
To prevent a complete collapse of Popular, Santander had to inject €13 billion of its own funds into the bank’s accounts — one of the biggest one-off transfers of funds in recent Spanish history.
If Santander hadn’t intervened and Popular had been allowed to collapse in disorderly fashion, some of its €60 billion of deposits would have been at risk. €35.4 billion were guaranteed (the deposit guarantee is limited to €100,000 per account holder). But Spain’s Deposit Guarantee Fund (FROB) didn’t have enough liquidity to cover those deposits and would itself have had to be bailed out by the Spanish state in order to reimburse Banco Popular’s customers. Either that, or the depositors would have to wait for the bank to be completely liquidated before getting some of their money back, which would have taken years.
Bear in mind that Popular was a smallish bank, relatively speaking, with just €140 billion in assets. It was certainly not “systemically important” — according to the criteria used by the Financial Stability Board (FSB), the international organization that decides which banks on this planet are too big to fail and which are not (although Italy’s government and banks are fast redefining those standards).
According to the FSB, there is only one bank in Spain that is officially too big to fail, and that’s Santander. Spain is home to another four banks (BBVA, Caixabank, Bankia, Bank de Sabadell) that are bigger than Popular was, but they are also apparently small enough to fail, despite the fact that the “insured” deposits of those banks’ customers would also not be covered by Spain’s Deposit Guarantee Fund — at least as it currently stands.
Which brings us to Italy, whose government over the weekend pulled off one of the most audacious bank rescue operations of modern times. The government committed €17 billion in taxpayer funds to bail out senior bondholders and depositors of the two Veneto-based banks, Banca Popolare di Vicenza and Veneto Banca. That money included a €5 billion capital injection for Italy’s biggest retail bank, Intesa Sao Paolo, which picked up the good assets and liabilities, such as deposits. Naturally, none of the above constituted illegal “state aid,” according to the EU’s Competition Commission.
As everyone wonders why the ECB allowed the Italian government and bank bondholders to get off so lightly, in the process undermining the EU’s rules on bank resolution, perhaps even fatally, one should perhaps consider just how the insured deposits of the two Veneto-based banks (estimated worth: €11 billion) would have been covered in the event of a bail-in resolution, given that:
- Italy was one of 10 countries identified by the ECB in 2015 that (unlike Spain) wasn’t complying with EU rules on deposit guarantee schemes.
- Italy’s banks, whose responsibility it is to cover bank deposits, are in no shape at all to suddenly raise €11 billion of funds. They couldn’t even scratch together €1.2 billion of funds before the weekend.
The ECB’s decision to allow Italy to bail out senior creditors and support Intesa to take on those deposits (liabilities that have to be paid, not cash) was in part based on the fact that neither the government’s deposit guarantee program nor the banks were in a position to cover the Veneto Banks’ deposits. But Italy could have saved its taxpayers a lot of money by guaranteeing all deposits and letting senior bondholders pick over the crumbs. By Don Quijones.
This is how desperate the Italian Banking Crisis has become. Read… Contagion from the 2 Friday-Night Bank Collapses in Italy?