Valuation in resolution

AuthorHellwig, Martin F.
IPOL | Economic Governance Support Unit
14 PE 624.417
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.

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