Valuation in resolution

• Author: Hellwig, Martin F.
• Pages: 14-20

IPOL | Economic Governance Support Unit

14 PE 624.417

VALUATION IN RESOLUTION

3.1 The Resolution of Banco Popular Español

Before discussing the challenges for valuation in resolution, I briefly review the resolution of BPE in

June 2017. For 2016 already, the bank had announced substantial write-downs on real-estate loans.

These write-downs more than wiped out the equity that had been raised in mid-2016. In early May

2017, the bank’s report for the first quarter of 2017 showed further losses and strengthened concerns

that the bank might actually be insolvent. The ensuing run on deposits accelerated towards the end of

the month. Emergency liquidity assistance to the bank was approved on Jun e 5, but then the bank was

declared failing or likely to fail on June 6 and resolved on June 7.

The resolution of BPE involved a complete bail-in of all equity instruments (share capital, T1 and T2

instruments) and a sale of business to Banco Santander for € 1. The resolution decision relied on an

independent valuation that the Single Resolution Board ( SRB) had ordered on May 23. The valuation

report (Valuation 2) assessed the bank’s equity as lying between € 1.3 billion and € -8.2 billion, with a

“best estimate” of € -2.0 billion. However, the report noted that the time span of 13 days had been too

short to provide more than a provisional valuation. A final valuation (Valuation 3) has recently been

prepared but is not yet public.

Not surprisingly, the investors who were bailed in are dissatisfied with the outcom e, and some of them

are going to court. The following matters may give rise to concern: First, the decision to declare the

bank failing or likely to fail was justified by liquidity considerations, rather than solvency considerations.

The assessment that, at the time of resolution, the ba nk had negative equity does not accord with that

justification. Alternatively, if solvency concerns were present, why were they not raised earlier, say after

the publication of results for the first quarter of 2017? Second, the admittedly short period for Valuation

2 may raise doubts about its reliability. The number for the best estimate for the bank’s equity shortfall

is eerily close to the total principal of the T1 and T2 instrume nts that were bailed in. The SRB focuses on

the “conservative” assessment of an € 8.2 billion shortfall, which the valuation report refers to as “worst

case”, in fact, the total principal of the T1 and T2 instruments that were bailed in is close to the “best

estimate” of a € 2 billion shortfall. Third, the sale of the bank to Banco Santander has created a fait

accompli, which does not leave much room for change in the valuation in the context of Valuation 3.

In considering this case, one must distinguish between procedural and substantive issues. Moreover,

for the procedural issues, one must distinguish between problems under the given legislation and

problems of the given legislation. As for the substantive issues, I am not convinced that the issues in

this case are very serious, nor do I believe that they can be eliminated; I see the substantive issues as

being closely related to the difficulties in the concept of valuation itself, which I discussed in the

preceding section.

3.2 The No-Investor-Worse-Off Principle

From the perspective of investors, bank resolution is problematic because the resolution authority has

the power to dispose of the bank’s assets, wholly or partly, without their having a say. In contrast, under

the insolvency laws of many countries, creditors have a say in an insolvency procedure. Moreover, the

procedures themselves are usually carried out under the auspices of a court or a court-appointed

receiver, with a possibility of legal recourse, which provides some protection.

In resolution under the BRRD or the SRM Regulation, the no-investor-worse-off principle is supposed

to provide protection against any wilfulness of the resolution authority at the expense of investors.