Introduction to the blog series on Banco Popular cases, by Jolien Timmermans

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On 1st June 2022, the General Court rendered its much-awaited judgments in the first five pilot cases (out of almost 100 cases initially lodged) concerning the 2017 Banco Popular resolution and dismissed these actions in their entirety (T-481/17, T-510/17, T-523/17, T-570/17, and T-628/17). These cases deal with the first ever banking resolution adopted at a European level[1], conducted by a newly established EU agency, the Single Resolution Board (SRB). Both the Banco Popular resolution itself and the EU’s Single Resolution Mechanism within which this bank was resolved, have been highly criticised in the media, by legal and economic scholars.

Contextual background: The Single Resolution Mechanism

During the financial and euro crisis, the Member State’s bank failure management consisted of two different scenarios: either the governments of the Member States would recapitalize their banks and bail them out using public finances,[2] or banks failed and went into bankruptcy. Member States and the EU simply had no other options and lacked clear legal powers to deal with failing institutions in an orderly way. Under the current European framework for dealing with banking problems, banks are normally liquidated under national insolvency proceedings or exceptionally resolved under the Single Resolution Mechanism. This newly created mechanism, that deals with failing (or likely to fail) banks, started functioning in January 2016. Its mission is to ensure an orderly resolution of failing banks with minimum impact on the real economy, the financial system, and the public finances of the participating Member States (i.e., mostly Eurozone members) and beyond. Its core objective, therefore, is ensuring financial stability in the Eurozone.

A resolution can be defined as “the restructuring of a bank by a resolution authority through the use of resolution tools in order to safeguard public interests, including the continuity of the bank’s critical functions, financial stability and minimal costs to taxpayers.”[3]  By restructuring a bank, its essential banking functions are maintained in order to prevent the negative consequences a liquidation might entail. Resolution by the SRB only happens when the collapse of a significant bank which is failing or is likely to fail would undermine financial stability in the Eurozone. Nicolaides explains that “a bank becomes insolvent when its liabilities exceed its assets. The assets of a bank are mostly in the form of loans it makes to businesses and households. When borrowers default the assets of the lending bank decrease in value and it has to absorb the resulting losses. The first in line to absorb losses are the shareholders. Therefore, resolution (…) necessarily results in losses for shareholders.”[4] The Single Resolution Mechanism (like the Single Supervisory Mechanism[5]) makes a distinction between so-called significant and non-significant banks. Banco Popular was labelled as a significant Eurozone bank and consequently was resolved at the EU level.

Factual background

On 7 June 2017, the SRB adopted its first major resolution decision which concerned Banco Popular Español S.A. (‘Banco Popular’). The ECB decided on 6 June 2017 that Banco Popular was ‘failing or likely to fail’ (‘FOLTF assessment’). Because the European Central Bank had notified the SRB that Banco Popular was ‘failing or likely to fail’, the SRB deemed this resolution to be necessary. By making use of the sale of business tool (as one of the four resolution tools[6]), the SRB decided to transfer all shared and capital instruments to Banco Santander S.A. (one of the country’s leading banks) for the amount of 1 euro. Banco Popular as a result became a solvent and liquid member of the Santander Group with immediate effect. Banco Popular, therefore, continued to operate under normal business conditions and continuity of services was guaranteed. The SRB and the Spanish resolution authority (FROB) decided that the sale was in the public interest. The SRB in its executive decision adopted a resolution scheme in respect of Banco Popular following the procedure in Article 18 SRMR. The resolution scheme entered into force within an hour following the Commission’s endorsement. The SRB’s decision was addressed to FROB which implemented it at the national level.[7] If the SRB had not done this, Banco Popular would have been wound up under national insolvency proceedings. As a result of SRB’s decision, the bank’s depositors were protected and the financial stability in Spain and Portugal was guaranteed. However, the bank’s shareholders and creditors were ‘bailed-in’[8] up to 100% of the value of their shares and lost a significant amount of money which led to the annulment proceedings of the SRB’s decision before the General Court.[9] Some of these cases ask for the annulment of the SRB and/or the Commission’s decision on the basis of Article 263 TFEU and eventually ask for damages based on Article 268 TFEU seeking compensation for the damage suffered, i.e. the money they had lost, as a result of the adoption of these decisions. To optimize the processing of the substantial number of cases lodged, the General Court decided to proceed with the examination of the five so-called ‘pilot cases’.[10] The substance of the legal claims and arguments raised in all these cases are covered by the legal claims and arguments invoked by the parties in the five pilot cases.

Claims raised by the applicants

The claimants invoked violations of a number of rights, such as inter alia the right of the defence, the right to effective judicial protection and the duty to state reasons in particular with regard to the Charter of Fundamental Rights, the duty of care and good administration, the right to property, the principle of proportionality and non-discrimination, the right to be heard, several provisions of the founding regulation on the grounds that the conditions for applying the resolution instrument were not met. In particular, the arguments relate to the fact that the bankruptcy of Banco Popular has not been demonstrated and that there was a failure to examine other instruments less detrimental to shareholders. The claimants also contested the valuation reports arguing that they were not fair, prudent, and realistic, as the expert (Deloitte) stated that there were several gaps and inconsistencies in the available information and that the valuation had to be regarded as highly uncertain and provisional. Some of these actions also raise objections of illegality with regard to the Regulation on the Single Resolution Mechanism, on the ground that the procedure provided for by that regulation infringes the principle of the delegation of power (Meroni doctrine) and violates a number of fundamental rights. The claimants argued that the resolution process was flawed and that the SRB did not fulfil its obligation to ensure that the shareholders and creditors were dealt with fairly. More specifically concerning the Commission’s decision, the Commission was criticized for not having thoroughly examined the SRB’s resolution before approving it. Although this case law is undoubtedly important on several levels this brief note can only flag some of its most prominent legal issues.

The criticism concerning the SRM, and the Banco Popular resolution has led to uncertainty as to the proper functioning of the entire European Banking Union. This created distrust among investors that failing banks would be wound up in an orderly and legalistic manner and that the SRB acts within the confines of the founding rules harming the banking sector. As Banco Popular was the first bank to be resolved under this system, the judicial review by the General Court is thus of tremendous importance to the mechanism.

Seven eminent contributors share their analysis of these cases:

  1. Rui Tavaros Lanceiro –  The possibility of judicial review of the SRB resolution decision in Case T-481/17 Fundación Tatiana Pérez de Guzmán el Bueno and SFL v SRB
  2. Phedon Nicolaides – Liability for the Resolution of Banks
  3. Filipe Brito Bastos – Referential reasons-giving and the limits of Union Agencies’ power
  4. Jane Reichel – Good administration for whom, by whom? The right to be heard and the right of access to files in resolution matters
  5. Sabrina Praduroux – Taking Financial Risks Out of Property Rights Protection under Article 17 of the EU Charter of Fundamental Rights
  6. Merijn Chamon –  The non-delegation doctrine in the Banco Popular cases
  7. Menelaos Markakis – Impact of the judgments on the institutional framework of the SRM and SRB

Posted by Jolien Timmermans, PhD Researcher at the Ghent European Law Institute.

[1] Several other Eurozone banks which became insolvent in the past years were wound up under national liquidation procedures. The Banco Popular resolution is no longer the only resolution conducted by the SRB, however. In March 2022 the SRB, following the war in Ukraine, decided that resolution action was necessary for Sberbank Europe AG in Austria and its subsidiaries in Croatia (Sberbank d.d.) and Slovenia (Sberbank banka d.d.). For more information see : https://www.srb.europa.eu/en/content/sberbank-dd-and-sberbank-banka-dd.

[2] These bailouts were often labelled as emergency rescue packages.

[3] SRB, “What is a Bank Resolution?”, https://srb.europa.eu/en/content/what-bank-resolution (28/08/2020).

[4] Phedon Nicolaides, Liability for the Resolution of Banks, (forthcoming in this series on the REALawblog).

[5] https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html

[6] Article 22(2) (a) – (d) SRMR.

[7] SRB, “Decision of the Single Resolution Board in its executive session of 7 June 2017”, SRB/EES/2017/08 and SRB,  https://srb.europa.eu/en/file/notesummarisingeffects07062017pdf  (Consultation 28/08/2020).

[8] ‘A ‘bail-in’ occurs when a company’s shareholders and creditors bear the burden by having a portion of their debt written off or converted into equity. This ensures that moral hazard is properly addressed and avoids the use of taxpayers’ money.’ SRB, “Resolution Q&A”, https://srb.europa.eu/en/content/resolution-qa (Consultation 28/08/2020).

[9] For an overview see: EBI, “The Banking Union and Union Courts: overview of cases as at 1 June 2020 – Actions related to the resolution of Banco Popular Español S.A.”, https://ebi-europa.eu/publications/eu-cases-or-jurisprudence/  (Consultation 28/08/2020).

[10] T-481/17, T-510/17, T-523/17, T-570/17 and T-628/17.

Suggested citation: J. Timmermans, “Introduction to the blog series on Banco Popular cases”, REALaw.blog available at https://wp.me/pcQ0x2-sx.