| dc.description.abstract | In June 2017, Spain's Banco Popular, the country's fifth largest bank, failed in an orderly fashion-vindicating, it seemed, the rules put in place to manage such insolvencies following the 2008 Financial Crisis.' Weighed down by a $100 billion portfolio of bad loans-including toxic mortgages doled out prior to the 2008 Crisis-Banco Popular was sold off to a competitor for the token sum of one euro and handily wound up without much of an effect on the market. It had lost the confidence of its depositors, who were rushing to withdraw their savings, as well as that of the market, where its share price was plunging. With these rapidly deteriorating prospects, authorities triggered regulatory processes that could take the failing bank and wind it up, preventing the sort of chaos seen in the aftermath of the bankruptcy of Lehman Brothers. Importantly, the losses fell on those who should bear them. Banco's shareholders and those holding securities designed to convert to equity in a bank collapse, absorbed the cost. With its equity worth just one euro at its wind down, post-Crisis rules seemed to work exactly as planned, ensuring that a major bank's shareholders bore the costs of its bad behavior and prevented risks from spreading to other firms in the financial system.
But Spain's banks were not the only ones struggling in the summer of 2017. Italy's banking crisis that year culminated in the near collapse of the world's oldest bank and Italy's fourth largest lender, Monte dei Paschi di Siena. As with Banco Popular, authorities looked to Monte's shareholders, and those whose bond interests would convert to equity, to bear the brunt of the collapse. On this occasion, however, around half of those holding the convertible junior bonds were everyday mom-and-pop retail investors. Rather than allow losses to fall on this more vulnerable group, the Italian state set aside 1.5 billion euros in taxpayer funds to buy up their claims and to insulate them from the worst of the losses.
These contrasting approaches to large bank failures illustrate the gap between the aspirations of post-Crisis rules-designed to make shareholders absorb the impact of risk-taking and the muddier reality of implementation. In response to the 2008 Crisis, regulation requires banks to shore up their balance sheets by maintaining a much thicker "rainy day fund," comprised more fully than in years past of capital raised from equity investors. Buffered by a deeper reserve of equity, banks can operate more safely in good times, as well as access funds to pay off depositors, short-term creditors, and senior creditors in case of failure." | en_US |
