22nd June 2017

The resolution of Banco Popular

Written by Mark Russell, BBA Senior Policy Director, Financial Stability

In its first significant test, the EU’s bail-in regime has shown that the days of state bail-outs for ailing banks are coming to an end.

As to be expected, Banco Popular’s shareholders and junior bondholders have been wiped out. But this was sufficient to stabilise the bank. Depositors have been protected, senior unsecured debtholders are also safe, and not a single euro of taxpayers’ money has been spent.

But, for the first time, Additional Tier 1 capital instruments (in this case, CoCos – Contingent convertible bonds) were written down to zero. CoCos are designed to absorb losses when the capital of the issuing bank falls below its regulatory capital minimum. But Banco Popular was put into resolution before the CoCo conversion was triggered. Interestingly, the Spanish CoCo market bounced in the wake of the write-down.

And the much-feted ‘resolution weekend’, over which the Bank of England would expect to seal a bank resolution, had been squeezed into an overnight slog!

So not only had resolution gone better than clockwork, investors’ commitment to bail-inable bonds held firm, despite the first big loss. A robust market for these bonds is essential to the sustainability of the resolution framework.

The ECB, the SSM, the SRB (Single Resolution Board), the FSB (Financial Stability Board), the IMF, national  governments, and most importantly bank customers, now know that resolution can actually work.

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