At the time of the banking crisis in Cyprus, a few years ago, I had a lot to say about the new 'bail-in' rules that would force investors and depositors, rather than government, to 'rescue' a failing bank. Effectively, the former could be forced to hand over some, or even all, of their money to rescue the bank, even if the bank (or the government) was responsible for the conditions that caused its failure. Other nations eagerly seized on the idea (after all, what government wants to have to find a few billion in spare cash, without warning?) North America is not exempt, with both the USA and Canada adopting similar policies.
The reality of such policies has now been seen in Spain.
European authorities stepped in to avert a collapse of Spain's Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country's biggest lender.
Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9 billion) of capital to absorb Spain's sixth biggest bank.
. . .
Santander's takeover of the bank, which has been weighed down by risky property loans, for a nominal one euro marks the first use of a stricter European Union regime to deal with failing banks adopted after the financial crisis.
The sale was organized in less than 24 hours, and followed a recent acceleration in the withdrawal of deposits, which two people with knowledge of the matter said had in recent weeks hit 18 billion euros, equivalent to almost one quarter of the total.
. . .
"This deal is good for Spain and it's good for Europe," Santander chairman Ana Botin said of the agreement, which breaks the mold of using taxpayers' money, instead imposing losses on shareholders and creditors of the bank.
This resolution worked in Santander's favor, and was described by two debt investors as unexpected, with the owners of so-called AT1 and AT2 bonds suffering roughly 2 billion euros ($2.2 billion) of losses and shareholders losing everything.
There's more at the link. Bold, underlined text is my emphasis.
There's no word yet on when (or even whether) depositors at Banco Popular will be allowed to withdraw their funds. The takeover was orchestrated within 24 hours, for a token amount of one Euro. Both banks were part of the seven largest Spanish financial institutions. To put the transaction in US terms by the size of the financial institutions, it's as if Morgan Stanley had been taken over by JPMorgan Chase for one dollar.
It's worth noting that the takeover didn't require all the new powers vested in European banking authorities.
The forced sale is the first major action by the Brussels-based Single Resolution Board, set up in January 2015 to deal with euro-area bank failures and wind them down with minimal impact on taxpayers and financial stability. Popular’s situation had become more urgent in recent weeks. Chairman Emilio Saracho struggled to find a buyer, plans for a possible share sale were complicated by a stock slump and the bank’s liquidity situation worsened.
. . .
In the case of Popular, the SRB used only a few of its resolution powers, including the sale of a failed lender to a sound firm for a token price, the wipeout of shares and additional Tier 1 debt and the conversion of Tier 2 bonds into shares. It didn’t have to resort to more drastic measures foreseen in EU law, such as taking over the institution or imposing losses on senior creditors.
Again, more at the link. The SRB could have required depositors at Banco Popular to forfeit part or all of their funds (which would have been unilaterally 'converted into bonds' to fund the rescue, with no guarantee that the bonds would ever be worth anything or be capable of redemption). At least the depositors dodged that bullet . . . but investors are out several billion dollars, in terms of bonds and shares that have been declared worthless by bureaucratic fiat.
It'll be a worthwhile exercise to study how this plays out in the longer term. Essentially, it demonstrates that in Europe, bureaucrats can now dispose of financial institutions as they see fit, and investors and depositors have no say in the matter. The same principles are operating in the USA as well - as seen in the 'bail-out' of General Motors, where pensioners and bondholders in some companies were stripped of their assets to ensure union cooperation. (This is why I swore at the time never to buy another new GM vehicle, ever, unless those wrongs were righted. I was sickened by the hypocrisy of the bail-out. I've kept that vow ever since, and I know many others who've done the same.)
The moral of the story is, the market is no longer in full control of our financial system. In the last resort, it's unelected bureaucrats who will make decisions that affect all of us - and our interests and needs are not their top priority. They're going to look after 'the system', because that's what appointed them and pays their salaries. Sucks to be us, I guess.