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The European Central Bank (ECB) and European Commission (EC) gave their go-ahead for the sale early on Wednesday morning after the ECB deemed the Banco Popular to be “failing or likely to fail”.
"The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due," it concluded.
The Banco Popular's rescue will not cost the taxpayer anything, because Santander will raise €7bn of new capital from the markets €7bn to cover the capital shortfall and strengthen the Popular's balance sheet.
Banco Popular’s collapse was primarily due to ‘toxic’ real estate loans on its books, and its failure to raise fresh capital. The bank made some bad loans before the financial crisis triggered a major Spanish housing crash, and its management have been unable to fix the damage. Back in February, Popular posted a €3.5bn annual loss due to bad debts, restructuring costs and various writedowns. Then in May it admitted that it was setting aside even more money to cover real estate losses.
Its new chairman, Emilio Saracho, has been trying to sell assets and issue more shares to raise capital, but the market has proved unreceptive to his efforts. The crisis escalated in recent days, as a series of potential buyers dropped out of an auction to buy Banco Popular. With capital levels running dangerously low, and its shares in freefall, the ECB was forced to step in and trigger today’s rescue.
Popular’s attraction to fellow banks is its retail banking division, and its strong SME business, which will bolster Santander’s existing business, and give it a larger share of the Spanish banking market.
Photo: Pierre Moscovici, European Commissioner for Economic and Financial Affairs.
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