Question

provide a brief summary of the lessons that investors should learn from the Collapse of Banco Popular. Was the restructuring successful? Do you agree that US capital adequacy requirements are more stringent than European ones?

Answer 1

ANSWER:

Banco popular Spain's fifth largest bank with over $100 billion in loans, collapsed earlier this month, forcing it into the arms of its rival, Banco Santander. Later Spain's largest bank bought the failing institution for the nominal sum of one euro after depositors withdrew money en masse and the company's stock price plunged.

Rather than panic though, world financial market shrugged and eurozone regulators congratulated themselves for directing a big bank rescue without having to tap taxpayers.

Isn't it good to know that everything is under control among eurozone bank?

That is the view investor seems to be taking. Whistling pas the banco popular graveyard, many seem eager to ignore the warnings this failure raises about rising risk in the European Banking Sector.
Regulators on both side of Atlantic, too, seem unfazed by the incident as they continue their push to reduce the size of capital cushions that bank must set aside for bad times.

Believe it or not, Banco Popular problems can be traced back to the mortgage mania of over a decade ago. Toxic home loans, moldering on its books all these years were a major cause of its collapse.
But its rescue European financial regulators say proved that the mechanisms created after the 2008 crisis work well. After all, no taxpayer money was involved in the takeover, those on the losing end included investors in the banks' stock and in the $1.4 billion in debt-like instruments Banco popular issued to provide a capital cushion.

Santander's Shareholders are also taking a hit: Their holdings are diluted by the bank's decision to raise $7.9 billion in equity to shore up its balance sheet.

But there is much for investors to learn in the Banco Popular meltdown :

LESSON NO. 1: Don't trust bank stress test results
Financial Institution must have capital on hand in order to absorb losses. And stress test was designed by regulators to assess how resilient bank balance sheet will be during downturns.
In 2016 Banco popular conducted a stress test in cooperation with European Bank Authority. Although everyone knows how troubled Banco popular was the test told a rosier story.

Consider for e.g the institution's common equity Tier 1capital a measure that takes its equity or ready capital and divides it by risk-weighted asset it holds. In the 2016 report, that measure stood at 10.2 percent of an asset which was below the 12.6 percent average among 51 Big European banks but not the worst on the list.
Even in as so-called adverse scenario, the 2016 test said Banco popular would have excess capital of 6.6%

LESSON 2 of the Banco Popular collapse is that regulators should require banks to maintain a higher leverage ratio another measure of capital adequacy. And yet this is a regulator requirement the Trump administration wants to loosen.

RESTRUCTURING
Restructuring which officially happened Santander pair Euro1 ($1.12) for Spain's 5tth largest bank is the first illustration of the resolution framework that has been several years in making. The first step was taken after the financial crisis to strengthen the EU banking system and prevent taxpayer-funded bailouts. Which resulted in the launch of the banking union in 2012. The SSM and Single Resolution Board (SRB) are its 2 flagship initiatives.

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