Shareholders wiped out after Spanish bank failure

For over a year now we have been warning that many large Euro banks are in serious financial trouble. This week, after burning €3.6 bln ($4 bln) of emergency central bank funding in the first two days of the week, Spain’s Banco Popular suffered the eurozone’s first large-scale bank run. A steady stream of deposit withdrawals turned into a full fledged flood as news that the bank was in trouble spread. Note that this was just days after their chairman told his employees “don’t panic”, as stock prices tumbled.


The Spanish bank, weighed down by €37 bln ($41.4 bln)) in mostly toxic property loans, was forced to tell authorities in Madrid on Tuesday that it would be unable to open the next day without a rescue deal to shore up its rapidly evaporating liquidity.

This is the first crisis under the EU’s new regulations related to failing banks, where the rescue of the bank does not impact depositors, burden taxpayers, or they hope, freak out the markets. The big losers are the shareholders.

Understand that Banco Popular is by no means the only bank in Europe at risk. The total value of non performing loans (NPL) in Europe is €1.06 trillion! That €1.06 trillion equates to 5.4% of the entire EU’s total loans, and it is more than triple that of other large banking sectors such as Japan and the US.

But while the whole EU has 5.4% of toxic loans, on a country by country basis, the picture is much scarier. A shocking 10 of the 28 EU countries have an NPL ratio greater than 10%.

  • Cyprus 49%
  • Greece 46.5%
  • Slovenia 19.8%
  • Portugal 19.2%
  • Italy 16.6%
  • Ireland 15.8%

In Cyprus and Greece almost 50% of all loans are non-performing. Italy, whose €350 billion of NPLs accounts for over 66% of Europe’s entire toxic debt stock.

This change of policy where taxpayers and bank clients are not the victims is a popular one. In the Banco Popular rescue the solution was that the European regulators took control of the struggling bank, wiping out its shareholders and junior bondholders, then selling the bank for a symbolic €1 to its bigger rival Banco Santander, which was the only bidder in the overnight sale process.

This brings a whole new risk to owning Euorpean banking stocks. If you owned Banco Popular stocks, you just lost 100% of your investment. There was no bankruptcy sale, no sale of assets such as property etc, to offset losses to shareholders.

The game has changed and there will be many more bank failures as the percentage of toxic loans in Europe is massive!

Stay tuned!