The weight of claims stacking up at the European Court of Justice against the Single Resolution Board’s decision to place Banco Popular Espanol into resolution in June is quite impressive: between June 7 and September 28, 75 separate cases were filed at the ECJ.
The chances of success for any of these actions would seem to be very thin, but that doesn’t seem to be stopping investors bringing them.
The ins and outs of the speedy decision by the SRB to place the troubled bank into resolution and sell it to Spanish rival Santander for €1 have been well discussed.
As the dust settles and the nature of the claims that have been brought against the decision become slightly clearer, there seem to be some fundamental questions about the transparency of decision-making at the new resolution board that could do with closer scrutiny.
The nature of the run on the bank is central to this. For a troubled bank to experience a run is hardly unexpected. The key issues here are whether or not the SRB’s own actions exacerbated the run and why the bank was not kept on emergency support until June 9, which would have given the regulators more breathing space to examine their options.
Banco Popular lost €3.5 billion in 2016 and reported a first-quarter loss of €137 million at the beginning of May. NPLs stood at 15% of the loan book.
On May 23, SRB chair Elke König revealed that it was watching the bank, a revelation that was followed up by the subsequent leak on May 31 from an EU official that an early warning had been given that the bank might have to be wound down.
There is little doubt that these actions exacerbated the bank run – something that everyone involved would have been only too aware of. They triggered an immediate 50% slump in the bank’s share price.
Many state-owned entities seem to have been particularly quick off the mark in withdrawing their deposits.
It was the severity of this run that prompted the regulator to decide the bank was failing or likely to fail on Wednesday, June 7.
Bank resolutions are meant to happen at weekends. Some €3.6 billion of emergency liquidity had been given on the Monday and Tuesday beforehand, and it hardly seems likely that the decision was made to throw in the towel on the Wednesday.
Why was the timing so mismanaged?
This lack of transparency over how and when the SRB reached its decision on Popular forms the cornerstone of the claims that are being brought against it.
Investors are claiming that the decision was implemented without due process.
They say it was a clear violation of EU law, which states that before anyone can be deprived of their property there must be a judicial review.
This was, however, an extraordinary situation involving a bank in the middle of a panic-induced run and crucially where there was a buyer in place.
Early deposit-flight by local authorities, incautious comments from the SRB itself and a top-secret valuation all fuel the anger of investors, who feel they have been shut out of a process that was supposed to add clarity rather than take it away
The SRB can claim that it was clearly in the public interest to call time rather than consider other solutions such as pumping in more capital or selling assets.
Investors may not like it, but it is hard to argue that Santander’s acquisition of Popular was not in the public interest.
Negotiations were ongoing but the liquidity crisis forced the SRB’s hand. One suit claims that the decision to sell to Santander was made only 77 minutes after the SRB determined that the bank should be put into resolution.
Might investors have any success challenging the decision on the basis that it was effectively pre-packaged and that other solutions were not given a fair hearing?
The fact that the whole process took 24 hours seems to preclude the idea that all avenues of rescue were exhausted.
All requests for further clarity on the SRB’s decision-making by aggrieved investors have so far been stonewalled. The regulator has said that it is not in the public interest for its unredacted resolution decision or the valuation report that was prepared by Deloitte to be made available.
This is, it says, because its release would trigger an adverse market reaction.
This seems contrary to the idea of having a single resolution board and European resolution regulation. Surely the whole point is that the actions of the regulator should be predictable? That is what the rules were designed to achieve.
By arguing that shining a light on their methodology would give rise to investor expectations, the SRB is essentially asking to operate in a black box.
That is never going to go down well with those that invest in the banks it is there to resolve. Any claim for damages will rely on the Deloitte valuation – claimants will fight hard through the courts to try to get their hands on it. Actions for damages would seem to have a greater chance of success than those to nullify the decision altogether.
The sheer number of cases that have been filed against this resolution does not mean that there is a greater chance that any of them will succeed.
There have been actions in Spain against FROB, the Fund for Orderly Bank Restructuring, while a group of Mexican investors looks likely to bring a claim against the Spanish government under international arbitration on the basis that the latter has broken the terms of the investment treaty that exists between the two countries.
As this was the first resolution of its kind, the outcome of challenges against it matter for all European FIG investors.
Early deposit-flight by local authorities, incautious comments from the SRB itself and a top-secret valuation all fuel the anger of investors, who feel they have been shut out of a process that was supposed to add clarity rather than take it away.