European regulators have pushed a dying Spanish bank into the arms of Banco Santander SA, the euro zone's biggest lender by market value.
The takeover of Banco Popular Espanol SA saves face for regulators and politicians eager to avoid an embarrassing taxpayer rescue. It allows Santander to boost its own balance sheet and scoop up a rival for a song.
There are risks ahead, notably from litigation or worse-than-expected losses. But it's a sign the rules the European Union brought in after the financial crisis to defuse future bank failures are working.
Next to past tales of woe among other European banks that have run into trouble, such as Italy's Monte dei Paschi di Siena SpA or Portugal's Novo Banco, the rescue of Banco Popular for one euro has been relatively clean. The ECB declared Popular was failing or likely to fail, setting into motion mechanisms designed to wind down banks without disrupting financial stability or soaking taxpayers.
Losses have been privatized. Santander will raise 7 billion euros ($7.8 billion) from shareholders to help swallow its rival. Investors holding Popular's shares and its riskiest debt have been wiped out at a cost of 3.3 billion euros. Senior bondholders are protected.
Regulators have acted credibly, helping to bolster the view that Europe's banks are turning a corner.
Sure, you could argue that Banco Popular's past has been emblematic of foot-dragging and poor governance: It had tapped shareholders for cash three times in the last five years and faced a 5 billion-euro capital gap.
But the broader message is that other banks that find themselves in Banco Popular's situation in future will find it harder to get special treatment. The fact that Santander's cash call is fully underwritten also supports renewed faith in Spain and the euro zone's economic recovery.
It doesn't look like a reckless piece of empire-building by Santander Chairman Ana Botin. The fundraising appears big enough to absorb losses from the Popular takeover, but isn't so big as to worry investors that it's being used to cover losses from other parts of the business.
In all, Santander expects the takeover and fundraising will have a neutral to "slightly positive" impact on its capital ratio, which at 10.7 percent is still a relative sector laggard. The bank will therefore have to come good on its promise to cut costs by 10 percent over the next three years. A 25 percent share of the Spanish small-business market will help.
There is certainly the potential for skeletons lurking in the closet, considering Popular's rocky past. The bank's last CEO stepped down just seven months into the job after an internal audit uncovered surprise losses. And the wipeout of hybrid debt could lead to lawsuits from holders of those securities.
But there's also a chance that the rights offering can absorb some or all of those risks: The total additional Tier 1 and Tier 2 debt issued by Banco Popular stands at around 1.8 billion euros.
It won't always be this straightforward for Europe's regulators. Popular was an outlier in terms of risk, and hadn't rattled markets more widely. Santander is a useful, deep-pocketed bidder. But investors have clamored for a credible rule-book and more mergers to clean up bad banks.
This is one rare example that surely fits the bill.
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