Banco Popular and The Bank Recovery and Resolution Directive
On 5 April 2017 The European Banking Authority published its final guidelines on the rate of conversion of Debt to Equity in the event of a Bail-In, available here. A Bail-In outlined by the European Commission as “The main aim of bail-in is to stabilise a failing bank so that its essential services can continue, without the need for bail-out by public funds. The tool enables authorities to recapitalise a failing bank through the write-down of liabilities and/or their conversion to equity so that the bank can continue as a going concern.”
On 6 June 2017, Banco Popular Español S.A. was declared by the ECB as “failing or likely to fail”, “The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due.” See publication available here. The ECB notified the Single Resolution Board (SRB), an independent agency of the ECB resulting in a forced sale. Banco Popular sold to Banco Santander in an overnight auction for €1. Bloomberg reported that this takeover will see Banco Populars Stock and Bond holders lose about 3.3 Billion Euros. Losses were not imposed on senior creditors in this case.
It is worth noting that Spain’s Banco Popular, Bank of Ireland, Italy’s Monte dei Paschi and AIB ranked among the worst in the 2016 European Banking Authority’s Stress Test of 51 European Union lenders. The EBA Stress Test analysed how the financial institutions could withstand a three-year theoretical economic shock. Analysts set a basic pass mark of 5.5%, AIB was below this at 4.31% but has undergone fundamental restructuring. In a statement following the results AIB said it was “well capitalised” and the stress tests were based on its 2015 balance sheet and “does not reflect current or future improved performance”. We can see the 2015 and 2016 figures on the AIB Investor Presentation available here.
The share price of Banco Popular declined by almost 50% in the week leading up to the takeover, seen below on the Bloomberg graph:
When analysing the suitability of a particular investment option, it is important to consider the overall effect it would have on your long term Financial Plan should you lose some or all of the capital invested. For this reason Metis Ireland recommend a diversified portfolio, paying particular attention to your preference and capacity for risk.
If you are considering the purchase of bank shares, we strongly recommend you familiarize yourself with the European Commission’s Bank Recovery and Resolution Directive (BRRD) available here before deciding on an investment amount relative to your portfolio.
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland. All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts