The shadow of the 2008 financial crisis loomed over the banking sector again on Wednesday when a Spanish lender was rescued from collapse by Santander and Royal Bank of Scotland racked up a £1bn bill to end a legal battle sparked by the bailouts by UK taxpayers nearly a decade ago.
The European authorities deployed new rules for the first time to allow Santander to rescue its ailing rival, Banco Popular. Popular is the sixth biggest bank in Spain and has been weighed down by the legacy of bad lending decisions made in the run-up to the financial crisis.
Santander – a household name in the UK after its takeover of Abbey National, Alliance & Leicester and Bradford & Bingley – paid just €1 to take over Popular but tapped its shareholders for €7bn (£6bn) to cover the bad debts facing the lender.
The deal took place hours before the markets opened on Wednesday after an eleventh-hour rescue deal put together by the eurozone’s new banking body, the Single Resolution Board (SRB). It was triggered by the European Central Bank, which had declared that Banco Popular was “failing or likely to fail” – the first time a eurozone bank had been given this classification.
Elke König, chair of the SRB, made clear the deal avoided a repeat of the 2008 crisis when taxpayers were forced to bail out banks. “The decision taken today safeguards the depositors and critical functions of Banco Popular. This shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers’ money from bailing out banks,” said König.
It was a first major use of the new regime and Ana Botín, chair of Santander, said: “This deal is good for Spain and it’s good for Europe”. She told Bloomberg that she felt “absolutely no pressure at all” from politicians to rescue Popular.
The troubled Popular, weighed down by almost €40bn of bad loans, had been seeking a buyer since March. The deal has meant that shareholders have been wiped out, as were some classes of bondholders.
As the markets were digesting the implications of the Spanish rescue, a high court in London was also crawling over the 2008 crisis, as RBS took steps to avoid a bruising encounter with shareholders that had threatened to force Fred Goodwin to give evidence.
The case, brought by 9,000 retail investors and a handful of major institutions, dated from April 2008. They claimed they were misled by the former RBS boss, three former directors and the bank itself when they backed a £12bn cash call. The bank was bailed out six months later leaving them nursing heavy losses.
The case, which had been due to start on 22 May, had been subjected to a number of adjournments after a last-minute settlement offer from RBS. When the court resumed on Wednesday, the judge agreed to halt the long-running battle. However, in an unexpected twist, Mr Justice Hildyard left open the door for the case to be revived as 13% of the investors who were part of the case had yet to agree to the out-of-court deal. The legal battle has cost RBS about £1bn – an estimated £900m in settlements to shareholders and £100m in legal fees. RBS had settled with 87% of the investors, which had made claims before this case began, and the judge said ending it had not proved easy.
“In a difficult and novel situation, the process of bringing an end is not as easy as might be thought,” said Hildyard, who has called for a review of the way such complex lawsuits are brought.
The judge has said he wants to know by the end of July if those who do not settle want to resume the trial. To do so, they would need to prove they have the funding.
While Goodwin looks likely to escape a court hearing, Rachel Reeves, who was a Labour MP on the Treasury select committee before the election was called, raised the prospect of the former RBS chief executive being called to parliament.
