Elke König, chair of the Single Resolution Board (SRB), stated last Wednesday that the resolution “met exactly what the banking rules are about”.
The resolution appeared to achieve a fundamental aim of the post-crisis resolution regulations — no taxpayer money was used. Instead, the shareholders and subordinated debtholders picked up the bill.
Along with equity, Banco Popular’s additional tier one (AT1) bonds were written off entirely. Tier two (T2) bonds were converted into equity — although as the bank was then sold for €1 they were effectively written off as well. This sent a message to markets across Europe: regulators are not be afraid to use their powers and impose losses on subordinated instruments.
Except, as the dust starts to settle, it's not as clear-cut as bondholders on the hook, taxpayers off it.
That the taxpayer was saved from bailing out Popular was important in a country where several banks had to be rescued during the crisis, including Bankia, which required a €24bn bailout.
But the state may still end up subsidising the deal, through €4.9bn of tax credits transferred from Popular to Santander.
Spanish companies accumulate deferred tax assets (DTAs) from the tax they pay in loss-making years. These DTAs can be used as tax exemptions later on. Monetisable DTAs are guaranteed by the state even if the bank does not make enough profit in the future, and count towards core tier one capital (banks pay the state an annual fee of 1.5% of outstanding DTAs for this privilege). Popular held €2bn of these.
Other non-monetisable DTAs can only be used when the company comes back into profit. Popular held €1.33bn of these. Then there are tax loss carryforwards, of which Popular had €1.54bn, which can be taken off the tax bill in the event of sufficient future profits.
Luis de Guindos, Spanish Economy Minister, confirmed on June 12 that all these tax credits would transfer to Santander, although some believe their use may be limited by political pressure. If Santander is more profitable than Popular would have been, a virtual certainty, these tax assets may prove more valuable to Santander — and more expensive for the Spanish treasury.
Regardless of whether there is an actual increased cost to the taxpayer, the sight of Santander getting tax exemptions as a result of the deal after having bought Popular for the price of a couple of churros would be unlikely to go down well.
Spanish politicians have already kicking up a fuss about the low acquisition price, while left-wing opposition party Podemos has complained of the “concentration in Spanish banking in the hands of very few people”.
More significant for future resolutions is the matter of whether the losses suffered by the bondholders are legally watertight.
Santander has launched a €980m compensation scheme in the form of new bonds offered to retail investors who bought shares in Popular when it did a rights issue, or who bought subordinated debt issued in 2011.
The point seems to be avoiding future lawsuits: those who take up the bonds must waive their rights to pursue legal actions against the bank.
Meanwhile, investors are searching for a small number of bonds issued by a Popular subsidiary in the US, Total Bankshares Corporation, in the hope that US law proves more favourable to a challenge.
Compared to the three struggling banks in Italy which were propped up by state money, Spanish taxpayers and the SRB can be pleased with how the Popular resolution turned out. But it's not as simple as it first appeared. The SRB cannot rest on its laurels yet.