The resolution of Banco Popular Español, S.A. was approved under EU's bank recovery and resolution rules, as agreed in the post-crisis Banking Union framework. It involves the sale of Banco Popular Español, S.A. (BPE) to Banco Santander, a sound financial institution. The customers of Banco Popular will continue to be served with no disruption to the economy. All depositors continue to have uninterrupted access to the full amount of their deposits. Following the resolution decision, the bank can continue its business activities. No State aid nor aid from the Single Resolution Fund has been provided and the sale is subject to normal merger and regulatory review.
The Commission has endorsed the resolution scheme because the conditions for resolution were met: the bank was failing, there were no private sector solutions outside of resolution and there were no supervisory actions that would have prevented its failure. Resolution by sale of business is foreseen in the Bank Recovery and Resolution Directive (BRRD) under the EU bank resolution framework. It was the best course of action to ensure the continuity of the important functions performed by the bank and to avoid significant adverse effects on financial stability. In this specific case, losses were fully absorbed by shares and subordinated debt.
The resolution scheme entered into force on 7 June. Further details concerning the resolution scheme can be found in the SRB Press Release.
The EU resolution framework
During the recent financial crisis, taxpayers' money was used at an unprecedented level to bail out banks that were considered “too big to fail”, at the expense of other public objectives. This triggered the necessity to create a clear and comprehensive bank recovery and resolution regime to ensure long term financial and economic stability, while minimising the potential public cost of possible future financial crises.
The Bank Recovery and Resolution Directive (BRRD) establishes the EU framework to manage bank failures in a way that avoids financial instability and minimises costs for taxpayers. Moreover, the Single Resolution Mechanism Regulation (SRMR), sets out specific provisions for Member States participating in the Banking Union when banks need to be resolved.
The BRRD and the SRMR form the EU resolution framework, which provides competent authorities with comprehensive and effective arrangements to deal with failing banks, as well as cooperation arrangements to tackle cross-border banking failures. The key objectives of the EU resolution framework, in line with efforts at international level, are to preserve the continuity of banks' critical functions while avoiding the use of public funds and adverse effects on the financial system. Effective resolution should also address moral hazard, as one of its key functions is to enhance discipline within the markets. Resolution is therefore a vital complement to other work streams designed to make the financial system sounder, e.g. making banks stronger through requiring greater levels of better quality capital, greater protection of depositors, safer and more transparent market structures and practices and better supervision.
How resolution works in the EU
According to the EU resolution framework, banks are required to prepare recovery plans to overcome early financial distress, while resolution authorities are required to prepare resolution plans for banks once there are no alternative private sector measures or supervisory action that would prevent their failure. In order to be able to apply those measures, resolution authorities are equipped with comprehensive powers and tools to restructure banks by selling all or part of their assets and liabilities to third parties, and/or allocating losses to shareholders and creditors following a clearly defined hierarchy through the "bail-in" mechanism.
Since the BRRD entered into force on 1 January 2015, a resolution authority can decide to resolve a bank provided it deems that it is in the public interest to do so. For those banks that are subject to the Single Supervisory Mechanism (SSM), under the SRMR, it is for the SRB to determine that a bank should undergo resolution in case the bank (1) is failing or likely to fail, (2) there are no alternative private solutions or supervisory actions that would prevent its failure, and (3) a resolution action was necessary in the public interest. In that case, it transmits a resolution scheme to the Commission for approval.
In case the SRB considers it necessary to use the Single Resolution Fund, it has to notify the Commission. The Commission has to assess and take a formal decision on the compatibility of the use of SRF under EU State aid rules, as it would do for resolution aid provided by a national resolution authority. Once the Commission agrees to the use of SRF, the SRB can adopt the resolution scheme and transmit it to the Commission. The Commission then has to either object or endorse that resolution scheme. In case the Commission disagrees with the SRB as regards the amount of SRF support used for that resolution or whether the resolution is in the public interest, the Council has the final word.