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Resolution of a bank under law 11/2015: The Banco Popular case - Pérez-Llorca

We have experienced the first resolution of a Spanish bank under Act 11/2015, of 18 June, on the recovery and resolution of credit institutions and investment firms and Royal Decree 1012/2015, of 6 November, developing Law 11/2015. Such was the case with Banco Popular, the Spanish bank subject to resolution and subsequently sold to Banco Santander on 7 June 2017.

According to the legal resolution procedure, on 6 June 2017 the European Central Bank (ECB) carried out a ‘Failing or Likely to Fail’ assessment of Banco Popular and concluded that given the excessive deposit withdrawals, the speed at which liquidity was being lost from the bank and its inability to generate further liquidity, there were objective elements indicating that Banco Popular was likely to be unable to pay its debts or other liabilities.

Moreover, the ECB assessment determined that there was no reasonable prospect of any alternative private sector measures being able to prevent its failure within a reasonable timeframe.

Some of the preparatory actions carried out were due to the Single Resolution Board’s decision of 3 June 2017. This decision stated that the Spanish authority, known as FROB, should begin an open tender process to sell the entity – potential purchasers should execute a non-disclosure agreement and have access to a virtual data room with information on Banco Popular. The decision also established the deadline for filing offers to acquire the bank.

On 7 June 2017, the SRB adopted the resolution scheme determining the capital instruments to be written down and converted, and establishing the applicable resolution tool to be applied- namely the sale of the bank’s business through the transfer of all of Banco Popular’s shares and accepting Banco Santander’s offer to purchase all of Banco Popular’s shares for the price of €1.

On 7 June 2017 the FROB, the national authority responsible for implementing the resolution scheme, adopted and implemented the SRB’s resolution decision. This entailed the following actions:

(i) Reducing Banco Popular’s share capital to zero.

(ii) A capital increase of up to €1.346 billion to convert all the additional Tier 1 capital instruments.

(iii) Subsequent reduction of the share capital to zero (by writing down the new shares just issued under the capital increase to convert all the additional Tier 1 capital instruments).

(iv) Capital increase up to €684 million to convert all the Tier 2 capital instruments.

(v) The Transfer to Banco Santander of all the new shares issued in the capital increase to convert all the Tier 2 capital instruments.

Certain regulatory authorisations were requested and obtained during the night of 6 June 2017 by Banco Santander: the Bank of Spain’s authorisation for the acquisition of a significant participation in Banco Popular and the ‘fit and proper’ assessment for the new board members of Banco Popular; the General Directorate of Insurance and Pensions and the Spanish National Stock Market Commission’s authorisations; and the Bank of Portugal’s authorisation for the indirect acquisition of Banco Popular’s Portuguese subsidiary.

Approval of the merger control procedure by the European Commission was required since, unfortunately, applicable laws do not contemplate any exception to the general rule. Therefore, until the merger control final authorisation was granted on 8 August 2017, Banco Santander was only allowed to carry out exceptional measures to guarantee the continuity of critical functions in the transitory period and to avoid any further deterioration of its insolvency and financial ratios.

The transfer of Banco Popular to Banco Santander was fully effective from the date of implementation and execution of the resolution scheme and guaranteed the continuity of Banco Popular’s critical functions without state aid, a bail-in of eligible credits or access to the Single Resolution Fund.

Alfredo Lafita is a partner at Pérez-Llorca. He can be contacted at alafita@perezllorca.com

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