How Banco Popular failed
Thomas Hale and Gildas Surry, senior analyst at Axiom Alternative Investments, on the unanswered questions surrounding the bank's failure four weeks ago.
Produced by Alessia Giustiniano. Filmed and edited by Petros Gioumpasis.
Last month, the market for European banks was hit by controversy after Banco Popular effectively failed and was bought for just 1 euro by Santander. I'm joined today by Gilda Surry, an expert at Axiom Alternative Investments to discuss some of the controversies surrounding the failure of Banco Popular and how it's been received in the markets. So Gildas, thanks for joining us. What's going on with Banco Popular?
Well, indeed, it's the first test case of the new resolution framework that has been implemented at the end of 2015. The bank is big, 80 billion of deposits, and everything happened very quickly over a couple of days and with some significant adverse outcome for investors.
And of course for bond investors. We can see this chart here. Bank bonds in Europe have been resilient, but that's despite the Banco Popular losses. So investors got here for billions of euros here. What's the controversy in the market around the way those losses were imposed, around also the valuation of Banco Popular?
So in terms of losses being imposed, additional Tier 1's, equities have been written down in Popular to zero. And subdebts have been converted into shares that immediately got bought for just 1 euro by Santander. So it's a severe outcome that was not expected by investors because the bonds were trading above 50 in the hours before the resolution was decided.
And ultimately, some lost out. But on the following days, we've seen really highly within the additional Tier 1 asset class, where investors took comfort, as we saw, in simply the resolution in Spain, of these [? hostile ?] trading [? stories. ?]
Yes. And the failure of the bank was effectively caused here by liquidity problems rather than the solvency problems usually associated with bank bonds.
Weakness. So could you just talk us through what the theories are about why so many people pulled their deposits from this bank?
Solvency issues had been known for some time, and that's why the new management came and started to look for a buyer or a potential [? cap ?] raise. But it immediately led to some liquidity pressure. At the end of April, the Association of Spanish Banks indicated that deposits had fell to 67 billion. A couple of days later, management reassured investors that this deposit base had stayed at 77 billion. And so we suspected that the deposit mix of Popular was actually shifting, where institutions-- [? copper ?] deposits, maybe state agencies close to the SME sector-- were just changing the format of their deposits with Popular gaining security or gaining protection on this senior unsecured debt all sell format.
OK. And it's fair to say, then, that for a lot of investors in the market there are a huge number of unanswered questions about what really happened with the failure of Banco Popular. I mean, are there any other questions, for example the potential for other banks to recapitalise the bank, that seem to have been ignored?
Yeah, the lack of success for Popular to get central bank funding with 20 billion plus securities bought for you while big banks managed to get this central bank funding in 2015. And the lack of interaction with these investors that were willing to maybe inject equity into the bank before the liquidity crisis.
Some very interesting questions here, and a group of bond holders did hire lawyers last week to explore legal options. So potentially we'll get some answers later this summer.