The General Court of the European Union confirmed this week that creditors and shareholders who suffered losses due to the Banco Popular resolution do not have a right to compensation in 2017. The amount will be charged to the Single Resolution Fund rather than coming from another source, as it does not exceed the sum established by the resolution decision.
In several Luxembourg decisions that remain under appeal before the Court of Justice of the European Union within a two month and ten day window, the Single Decision Board concluded in 2020 that those affected did not have such rights. Consequently, they would typically be compensated only if they had not been worse off under a normal liquidation that would have resulted in the sale of the institution to Santander for one euro, according to the court’s declaration.
It is anticipated that shareholders and holders of subordinated debt will incur losses amounting to 11.4 billion euros under the European banking rules adopted after the financial crisis in order to avoid public bailouts that began with the Popular case.
european mechanism
Within the banking union, after the 2008 global financial crisis, the Single Resolution Mechanism was created with the aim of resolving banks in serious distress without using taxpayers money while preserving financial stability. When a bank faces serious difficulty or is likely to, the Single Resolution Board may adopt a resolution mechanism that requires approval by the European Commission.
The Single Resolution Fund is another pillar of the Banking Union. It is an emergency fund used to support resolution actions and is financed by the banking sector itself.
In June 2017, the Single Resolution Board adopted a resolution instrument regarding the Spanish bank Banco Popular, approved by the Commission, which led to the acquisition of Banco Popular shares by Santander Bank for one euro.
Under the Union Regulation on the resolution of credit institutions, if it is proven that shareholders or creditors of an institution subject to a resolution endured greater losses than those that would have occurred in ordinary liquidation under bankruptcy procedures, the Single Resolution Board may use the Single Resolution Fund to pay compensation.
popular case
To estimate any potential difference in treatment, an independent appraiser assessed the impact of a hypothetical liquidation scenario, and affected shareholders and creditors had the opportunity to present their claims. The SRB ruled that in the event of Banco Popular liquidation, the affected shareholders and creditors could not receive better treatment than the decision dictates and thus were not entitled to compensation from the fund.
Nevertheless, some affected shareholders and creditors appealed this decision in the General Court, which ruled for the first time on its legality this week and rejected all objections.
Sentences
The court rejected allegations that questioned independence. It is suggested that the consulting firm Deloitte, which valued the bank, relied on a violation of the right to be heard by those affected. The appraiser followed a sound methodology and did not incur avoidable errors in valuing Banco Popular assets.
The outcome of an ordinary bankruptcy procedure will therefore be the same as the result of the resolution; therefore the property rights of affected shareholders and creditors were not violated, the European court stated this week.
Banco Popular’s resolution has been the subject of numerous appeals before Spanish and local courts. European Justice has previously confirmed the legality of the operation in many decisions.