Banco Popular windup faces challenges over information as much as finances

Euro bank notes

🔊 Podcast

Europe has a zombie banks problem - that is, a collection of struggling and failing banks that cannot lend as much as the economy requires. In this podcast MLex Chief Financial Services Correspondent John Rega joins Brussels Managing Editor James Panichi to discuss the EU's institutional response to these zombies, including Spain's Banco Popular and Italy's Banca Popolare di Vicenza and Veneto Banca.


19 July 2017.  By John Rega

A legal challenge to the forced sale of Banco Popular Español might rest as much on how authorities handled information as on the financial details that cost bondholders more than 2 billion euros ($2.3 billion).

Disclosures and comments by the Single Resolution Board, the Brussels agency that ordered the sale of Popular to Santander on June 7, could be central to a potential lawsuit from holders of 850 million euros of the bonds rendered worthless in the transaction.

Any case would be a first court test of the powers of the SRB, which was set up after the financial crisis to handle bank failures in the eurozone. EU law states that bank creditors are eligible for compensation if a resolution action leaves them worse off than they would have been under conventional bankruptcy.

The Banco Popular bondholders, facing an Aug. 17 deadline to file suit at the EU's General Court, and Sept. 7 in a Spanish administrative court, are concentrating at first on scrutinizing the public record and seeking to obtain access to more documents.

The SRB published a summary of the matter on June 7 and its formal decision, with passages erased to protect confidential details, on July 11.

Legal action could challenge those redactions. The erasures include references to the bank's situation and resolution plans, as well as the first three steps in the SRB's procedure. The report also cuts out a valuation performed by Deloitte consultants that remains confidential.

The details were masked on the grounds of protecting secrets of a business now owned by Santander, as well as safeguarding other confidential aspects of resolution planning and information that could upset the market, according to the SRB.

Deloitte valuation

Under questioning from European Parliament members last week, SRB chairwoman Elke König said the board can't publish Deloitte's valuation because it contains confidential, market-sensitive information.

Bondholders could question that decision, if they go to court, by arguing that the values estimated for Banco Popular's assets will be central to any claim for redress.

The investor group might seek further documents from the European Central Bank, concerning its finding that Banco Popular Español was failing or likely to fail, and from the European Commission, regarding its approval for the sale to Santander.

Still to come is the SRB's after-the-fact valuation for Banco Popular. That report is mandated in EU legislation on bank failures.

Confidentiality questions

If the investor group sues, it might target potential breaches of confidentiality by the SRB, as well. A first instance relates to comments by König on Bloomberg television on May 23.

Those remarks came in response to a question of whether Banco Popular was in her sights, considering a decline in the price of its bonds.

König answered, "There are more banks than just one on our radar screen, and of course Banco Popular is also a case we are watching, but it's not the only one."

If the investor group sues, it also plans to raise a report that Reuters published on May 31, saying that an unnamed EU official had received an early warning about Banco Popular from König.

König told EU lawmakers last week that she was upset by the Reuters story, and denied being the source of the information.

The bondholder group might contend that revealing the situation to any person outside the SRB would be a breach of the law's confidentiality requirements, and the revelation sparked or accelerated the fatal deposit drain.

Court test

Banco Popular's finances will certainly be important for any litigation, as well.

The bank passed an EU stress test last year, and raised 5 billion euros of capital in recent years, before succumbing to an outflow of deposits before it could find a buyer or more investors.

Bondholders could challenge how Banco Popular came to grief under the watch of the ECB, as the day-to-day supervisor, as well as the outcome of the SRB's overnight scramble to sell it off.

All resolution cases will probably end up in court. Investors always have a hard time swallowing losses imposed by authorities.

That makes a court test critical to questioning, or legitimizing, the SRB's authority to strip investors of property.

But without more documents, the Banco Popular bondholders fear that challenging the official actions will be a tough task.