- On 7 June European authorities resolved Banco Popular, which was sold to Banco Santander for one euro.
- Shareholders and holders of certain bonds lost their investment; depositors lost nothing.
- It pays to review which products one holds, who issues them and what risk they carry, and not to concentrate all savings in one institution.
On 7 June 2017 European authorities resolved Banco Popular, which was sold to Banco Santander for one euro. Shareholders and holders of certain bonds lost their investment; depositors lost nothing. Behind those few lines lies a very hard blow for many people and companies who had entrusted their savings to the bank, and who found themselves overnight with a loss they had not expected.
The case also had symbolic value for the European financial system. It was the first time a mechanism designed to manage the fall of a bank without resorting to taxpayers’ money had been applied. For savers, the episode left a practical lesson on something often confused when signing up for a product at a branch: the difference between a deposit and an investment.
What a bank resolution is
It is the procedure by which the authorities step in at a bank in serious difficulty to prevent its collapse from dragging down the financial system. It was the first application of the new European resolution system, which aims for the bank’s investors, rather than taxpayers, to bear the losses. The aim is for a bank to be able to fail in an orderly way, without payments being paralysed or distrust spreading to other institutions.
In a resolution, the authorities act quickly and usually do so between one market close and the next opening. They decide which part of the bank continues, who acquires it and to whom the losses are allocated, following an order: shareholders answer first, then certain subordinated creditors, and only as a last resort others. That the bank keeps opening its branches normally is precisely part of the purpose.
Who loses and who does not
Bank deposits were not affected. By contrast, those holding shares or certain bonds issued by the bank lost what they had invested. The difference between a deposit and an investment product, which is sometimes confused when signing up at a branch, proved decisive. A deposit is an amount handed to the bank and recovered with its interest; an investment product can rise, fall or lose all its value.
This order of priority explains why risk must be understood before signing. Investors in a bank’s shares or bonds accept the possibility of losing when the bank has problems, and that is why such products offer, in theory, a higher potential return. When they are sold as if equivalent to a deposit, the confusion can translate into major losses for someone who was not aware of the risk.
What to check
It is useful to review which products one holds, who issues them and what risk they carry, as well as how much savings is concentrated in a single institution. It helps to ask in writing for information on each product, read the document describing its risks and ask without hesitation what would happen if the issuer had problems. A clear question in good time is worth more than an explanation after the loss has occurred.
If in doubt about an investment received through the bank, an independent adviser can help understand its terms and assess whether it fits each person’s goals and tolerance for risk. Spreading savings across several institutions and products, and keeping clear which part is liquidity and which is investment, is a simple form of protection. This text is general information and not investment advice.
Knowing exactly what has been contracted is the best protection for savings.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
