MercoPress. South Atlantic News Agency

Santander rescues Banco Popular, which was “failing or likely to fail”

Buying Banco Popular will cost Santander 7bn euros, around 2bn euros more than analysts had expected.

Spanish Banco Popular has been rescued from the brink of collapse by larger rival Santander for one Euro. Buying Banco Popular will cost Santander 7bn euros, around 2bn euros more than analysts had expected. Banco Popular was described by the European Central Bank as “failing or likely to fail” due to its dwindling cash reserves.The bank has struggled after billions in property investments turned sour.

 The ECB said: “The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due.”

The Single Resolution Board (SRB) - the body set up last year to deal with winding up struggling banks - pushed forward the sale after it was informed of the seriousness of the problem on Tuesday night.

Banco Popular bosses have spent the last few months attempting to shore up the bank's balance sheet by selling various assets. A bidding process for Banco Popular ended last month, but started to look shaky as a handful of institutions pulled out.

Santander chairman Ana Botin said it was a good deal for the bank. “The combination of Santander and Popular strengthens the group's geographical diversification at a time of improving economic conditions in both Spain and Portugal.”

However, shareholders appeared to disagree, with shares falling by 3% in early trading.

Aberdeen Asset Management's head of credit research Laurent Frings said: “This isn't a big surprise. The regulator has been looking for a solution to Banco Popular's problems for a while and time has essentially run out.

”But this is a test case for the Single Resolution Board, which was created in response to the euro area crisis to try to make the banking system safer.“

He added: ”This shouldn't pose any real problems for other banks or the banking system in Spain or Europe.

“It's essentially a case of the regulation doing exactly what it was created for. But it does show that there is real risk in investing in these second tier names in the banking sector.”

Banco Popular customers will be unaffected, and the ECB already protects all EU savers with deposits of up to 100,000 euros. But shareholders and bondholders will lose out as their investments become worthless.