By Javier Rivas, Director of the Master in Financial Management at EAE Business School
For a whole generation, Banco Popular represented two things: maximum efficiency and risk control. This lead the bank to rank among the best in terms of banking ratios and analysts’ preferences for decades.
Nobody in their thirties could ever have imagined that this bank, a paradigm of solvency and good banking practice, would find itself in this situation. To find the origin of the crisis, we have to look back a few years before the global recession, when the bank decided that the paradigm had shifted – its strategic assessment indicated that it had been excessively prudent, and so it changed to a constant quest for growth.
The problem with this new strategy was that the bank took on more than 35 billion euros worth of doubtful real estate assets. Probably, if the bank had recognized the problem 2-3 years ago and had taken aggressive measures to sell these assets, the situation may have evolved in a different direction.
To complete the complex panorama, the famous stress tests that measure solvency (and not liquidity) indicated problems that could be resolved with moderate capital increases, the last of which amounted to 2.5 billion euros. The bank complied with regulations, even the short-term liquidity ratio (the famous STL ratio exceeded 140% when the obligatory level was 80%).
The events that happened afterwards demonstrate a number of things:
Stress tests have an extremely limited level of validity, as it is the institutions themselves that calculate the capital requirements, depending on the scenarios given by the supervisor.
The fact that the largest banks are supervised from Frankfurt not only failed to improve the situation, but rather it worsened it. It is much better for the supervisor to be closer and have a clear grasp of the particular national features. The SSM was not the solution, but rather it contributed to the problem.
The STL ratio is a static measurement of the liquidity situation, which is fairly useless when a bank experiences deposit outflows on the scale of Banco Popular. The loss of the bank’s reputation was so dramatic that many Spanish public institutions even acknowledged that they had lost confidence in the bank.
If we add the fact that the new management team at the bank, headed by Saracho, was more concerned about getting the most attractive price for a feasible acquisition, and day after day it issued information that, while surely correct, was negative in terms of the evolution of the value, the perfect scene is set for what eventually happened.
How much value did Banco Popular really lose? With more than 35,000 doubtful assets, covered up to 65%, it was still more than 10 billion euros in debt. In addition, there were more than likely demands for capital increases with less than clear expectations, and an extremely tight capital base to tackle the implementation of Basel III framework in all of its aspects. All in all, it came to much more than the 1.4 billion euros that the bank was worth on the stock market.
In reality, the value was not negative and, as such, the European supervisor decided the bank’s resolution through the SRM and the Fund for the Orderly Restructuring of the Banking Sector (FROB). Santander was the only one not to ask for guarantees against potential future losses (for example, against claims) and it acquired the bank for one euro.
The question is whether Santander is doing the right thing. If it manages to cover the capital increase and free itself from the burden of the real estate assets, getting prices of around 50% of the assets’ valuations and, in addition, it avoids the claims for compensation from Banco Popular’s customers, who supported the capital increase in good faith, it will be the deal of the century. Otherwise, Banco Popular’s real estate burden will continue to weigh heavily on Santander.