Autopsy of Banco Popular Shows Fragility of EU Banking System

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Much of the money was being withdrawn by institutional clients, including global mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils,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?

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  25 comments for “Autopsy of Banco Popular Shows Fragility of EU Banking System

  1. Stevedcfc72 says:

    Great article Don Quijones.

    God if this was the case if I was living in Spain or Italy I’d pull any money I had out of my bank account at the moment.

    Unbelievable Santander had to use 13 billion of its own funds.

    What a mess.

    • MC says:

      Santander has been assured by the Spanish government a large part of those funds will be returned to them through tax credits.
      The entity of said tax credits is now been discussed but it’s likely to be well north of €10 billion, spread over five years.

  2. JungleJim says:

    This might explain the elite’s eagerness to do away with cash. It would eliminate runs on banks and allow the authorities to declare all of the ailing banks as solvent by a Bill of Attainder (ie solvency is what I say it is).

    • JMiller says:


      Eliminating physical cash would not prevent bank runs. Bank runs can happen just as well by having large numbers of depositors take money out of a bank electronically by transferring it to another financial institution like to another bank, a credit union, a mutual fund company, a brokerage, an insurance company, to a Treasury Direct account etc… In fact most money is moved in and out of the banks electronically. And of course people will still be able go to the bank and close their account and receive a cashier’s check.

      According to Wolf Street and other articles, Banco Popular had a bank run. Deposits were being withdrawn at a rate of €2 billion a day on average. Much of the money was being withdrawn by institutional clients electronically.

      So in a cashless society people can still close their bank accounts or take most of their money out of the bank electronically.

      Only capital controls, such as preventing people from closing accounts and limiting the amount one can withdrawal from their account, can stop bank runs.

      • Realist says:

        Capital controls do not apply to the big boys, only to the ordinary Joes

        • JMiller says:

          Capital controls MAY NOT apply to the “big boys” at least to some degree. That is possible. It all depends on who the “big boy” is and who is in charge of the capital controls.

        • Realist says:

          The white shoe boys, the untouchables, the corazines

  3. chip javert says:

    Not a single piece of good news in that very informative article (good job, DQ). However, by far the most concerning statement was:

    “…Italy’s banks…are in no shape at all to suddenly raise €11 billion…They couldn’t even scratch together €1.2 billion of funds before the weekend….”.

    That’s a pretty damning statement of how broken banks are and how widely known, at least among many managers, the problem is.

    In a road-runner cartoon, this is the moment Wile E. Cyote realizes he’s 100 ft off the cliff and 1,000 ft above the desert floor.

    The world has been watching this happen since the end of WWII, but is still absolutely amazes me that average hard working people have not rioted with pitchforks to stop the out-and-out theft of their life savings (you can call it taxpayer pays or depositor pays – one is just more direct than the other).

  4. mean chicken says:

    Blackrock is what I consider small cap.

    I must be missing something, as usual…

  5. Quadra says:

    Perhaps the next question to ask is:
    Why didnt the state let the senior bonds default?
    Why is it better for the state and the tax payers to take that loss?

    My guess is that the holders are other banks and then the snowball would have started to roll. i.e the dominoe has to stop early or the whole sector gets into serious issues.

    • mean chicken says:

      “Why is it better for the state and the tax payers to take that loss?”

      Great question, wonder if taxpayers get to continue paying the interest?

  6. unit472 says:

    Italy once had a system to reduce or eliminate NPL. Some large unsmiling men would visit the debtor and explain to him that he owed them money and bad things would happen if he didn’t pay . It worked apparently as Italy was not then known as a land of deadbeats.

    With youth unemployment where it is today it occurs to me that Italy’s banks could resurrect this debt collection practice by employing the toughest of its unemployed youth as debt collectors.

  7. michael Engel says:

    Macron/Merkel might choose to go easy on the divorce proceedings
    with the UK, for an entirely different reasons.
    For 70 there was no default in any developed country :
    not in Europe, neither in North America & Asia Pacific.
    In order to keep a clean sheet, a divorce from Greece, Portugal…
    should be permitted & encouraged.
    It will reduce the volatility risk. Reduce obligations of the core.
    It will strengthen the euro as a currency and empower the $EURUSD.
    The bigger size GDP countries will be sold to the global investors at
    higher price, as safer, better structure assets.
    The smaller size GDP/larger debt countries should fall through the sieve.
    Divorce papers & divorce proceedings have nothing to do with the fact
    that the two sides – Euro & UK -, go to bed together and still give each other a big hug.
    Nothing real, nothing official will happen in the next 10 years.
    The man in the house is Macron. What kind of man who has two,
    twice his age ladies, on each side. Perhaps they will treat him like two
    older mistresses competing with each others for love, is a very romantic mix.
    After all, for them, he is a Jr. lover, a cute kid.

    • Klaus says:

      I serioulsy disagree with the idea that “Macron/Merkel might choose to go easy on the divorce proceedings with the UK”.

      They have every single incentive to make it as devastating as possible, so to prevent any other country from defecting the EU and, furthermore, the Euro.

      Do you imagine an easy, comfortable divorce for the UK?. Next, Italy’s 5 Stelle woul go “See?, It wouldn’t be so bad”. Spain’s Podemos and Portugal’s socialist-communist government would go “See?, recovering monetary sovereignty wouldn’t go that bad”. Eastern European countries would go “See? they are not trustable partners”.

      No, divorce may have nice soft word, but incentives direct to a stormy divorce

      • Stevedcfc72 says:

        Lets see Klaus.

        I’m sure Companies such as BMW who sell big volumes in the UK won’t want a devastating-stormy divorce.

        Money talks.

        Eastern European Countries are already saying the Euro aren’t trustable partners.

        Italy-Spain-Portugal-Poland-Hungary-Czech Republic-Greece for starters don’t need to know what’s happening with Brexit to decide for themselves what they need to do.

        • Klaus says:

          Yep, money talks. It is true.

          It is also true that if we were talking money the EU would be gone a long time ago.

          The EU is a political project disguised as economics so people are easier to accept.

          And that is why the pro-EU politicians have every incentive to make Brexit as hard (read “devastating”) as they possibly can

      • Bonod says:

        The analogy that Brexit is a divorce is wrong, in a divorce court a judge settles the argument, in Brexit there is no judge there are simply two protagonists, I prefer the analogy of a boxing match with no referee. I worked most of my career developing business within the EU and the rest of the world, the rest of the world is much easier to do business with, I voted to leave. France is nice for holidays but I can live without doing business there. I really dont care how difficult Macron and Merkel believe they can make things for the UK, the harder they try the better the outcome for the UK, it seems like they feel the only solution available is that they must shoot themselves in the foot.

        • fajensen says:

          A foot-wound is a better showing than Theresa May eating a shotgun!


          Theresa May and her team is the very embodiment of principled incompetence. Their principles will be blocking any movement and the incompetence blocking any assessment of their position and the opposition. I predict the talks will go around in circles on a quite predictable pattern of demands, threats, outrage, then the same demands again stated differently because Obviously everyone else are stupid and cannot understand the might of their argument. Etcetera.

          I.O.W. It will not be possible to engineer an amicable “divorce”. The U.K. will insist on concessions that the EU cannot make, such as maintaining “the four freedoms” for British citizens and business, but not the other way around.

          Then, having failed on any reasonable deal, the U.K. will blame everyone else in particular Germany and France, who on their side will think that *any* mere financial loss is worth taking just to end the farce.

          That’s how it’s going to go.

        • d says:

          “That’s how it’s going to go.”

          And that is how Drunker and the Eurocrats have always wanted it to go.

          The Brexit process is only good for 1 group in the EU.

          The group that engineered it.

          The Ever closer union Eurocrat Dictators.

          The British complains about Eastern European mass immigration and uncontrolled Economic migrant immigration from outside the Eu were met with


          From Brussels.

          Britain has been A “Handbrake” On the Runaway Eurocrat Dictators in brussels. As any of the Eastern Eu states.

          Cameron inadvertently gave them an out, With his foolish election promise, and the Eurocrat Dictators grabbed it with both hands.

          The “jungle” in Calais, was closed. Practically within Hours of the Brexit vote to leave.

          The Rest of Europe is being played by the Eurocrat dictators.

          Brexit is a loose loose.

          The Average and below, European people, will be the biggest losers of all

  8. Stevedcfc72 says:

    Macron’s got his own issues in France, trying to drastically reform labour laws in France is going to take some doing. One whiff of anything wrong and the Unions will blow him out of the water.

    That sums the Euro up at the moment that ‘smaller’ countries should be permitted and encouraged to leave such as Portugal and Greece. This 27 united country organisation isn’t quite so united as it seems.

    As for the Euro and UK getting in bed together, for trade yes, anything else, no. The EU is so undemocratic.

    The UK and USA need to get into bed more especially on trade which isn’t a pretty sight considering that’s Donald Trump and Teresa May currently lol.

    The UK also needs to start getting into bed more with countries such as India.

    • fajensen says:

      Trade deals takes decades to negotiate, assuming that one has the skills and the people to do it. Those skills are presently on the EU side because EU member states has been outsourcing this function to the EU for two decades or more.

      It is very visible in that foreign ministers have been, for about the same timespan, clowns and buffoons that one would rather not have running around in “the kitchen” at home.

      The USA will trivially screw over the UK royally in any deal (of course the Daily Mail will see just the fact that an extortionate contract was signed as a great victory for the Tories)

      • Bonod says:

        The concept peddled by experts that trade deals are anything other at best than neutral is wrong, ‘experts’ need employment and they thrive on telling us how beneficial trade deals are. The idea of a trade deal taking decades to negoatiate is farcical, in the meantime the real world carries on trading. The money wasted on paying so called experts to negotiate TTIP was completely wasted. Do you think that Amazon Google Microsoft GE etc were ever prevented from doing business due to the lack of trade deals, they went out and did their own deals, if the product or service is desirable the customers will find a way to buy it. If it were up me Nigel Farage would be in charge of leaving the EU, Theresa May is on the way out.

        • fajensen says:

          You are correct so far that trade agreements are not a condition for trade happening.

          I was just trying to poke some holes the in the very optimistic view often heard from the “Brexiteers” that Britain will somehow be much better, faster even, at negotiating even better trade deals outside of the EU by basically whinging it (or just Because).

          Even Nigel Farage knows Nigel Farage well enough to resign from the responsibilty of work of Brexit (which actually does reflect well on the man, I think). I think the conservatives will prefer to keep Theresa May around as the scapegoat / bullet-sponge.

  9. d says:

    1 rule for Italy and another set for Cyprus and Spain.

    Not good NOT GOOD AT ALL.

    Perhaps this is the Multi-speed Eu that is being talked about???????

  10. Chrislongs says:

    Could just encourage everyone to move their euros to a German bank!

Comments are closed.