The Hidden Cost of Continuity: Capital, Reallocation, and Firm Outcomes

Santander’s decision to protect selected Banco Popular relationships had a hard balance-sheet limit. The acquisition enlarged its SME franchise, but it also weakened the acquirer’s regulatory capital position and created integration costs. This part of the Banco Popular case follows the path from that capital pressure to Santander’s portfolio choices, then asks whether the resulting continuity reached firms through surviving relationships, loan terms, total credit, and real activity. The answer is not a free expansion of lending: Santander preserved important inherited relationships while moving part of the adjustment into its existing portfolio, and the insulation was substantial but uneven.

A private transfer still consumes capital

A bank’s willingness to lend is not determined only by the expected return on a loan. It must also hold enough regulatory capital against the risks on its balance sheet. Capital is the buffer that can absorb losses and support continued operations. When an acquisition adds assets, liabilities, and borrower exposures, the buyer may need more capital even if the purchase price is small. The price paid for Banco Popular’s shares and capital instruments was €1, but the balance-sheet consequences of taking on the business were not one euro.

Banco Popular had zero net worth in the BIS account, and the acquisition was fully debt-financed. Santander’s CET1 ratio—the principal measure of its highest-quality regulatory capital relative to risk-weighted assets—fell by about 114 basis points. The ratio remained under pressure compared with other major Spanish banks after the transaction. Santander raised €7 billion in capital on 27 July 2017, less than two months after the acquisition, which partially rebuilt its buffer. The first year also included a reported €37 million loss associated with extraordinary integration charges, while recognition and sale of non-performing assets added to the strain described in the paper.

These details separate two questions that are often merged. The first is whether Santander had a reason to preserve Banco Popular’s customer franchise. The second is whether it had the capacity to support every inherited exposure while also meeting capital requirements and managing the combined institution. The capital raise shows that Santander sought to restore capacity; it does not show that the constraint disappeared immediately. A buyer can be strategically committed to a customer base and still have to decide which assets receive scarce balance-sheet room.

The study tests this capacity channel in two ways. Across banks, stronger capital ratios are associated with more robust post-resolution credit growth. This relationship does not mean that capital alone determines lending; better-capitalized banks may differ in other ways. It does indicate that the amount of capital available to a lender helps shape how it responds after a major resolution. For Santander’s pre-existing borrowers, the average post-resolution adjustment becomes statistically insignificant once capital conditions are included, which is consistent with capital pressure accounting for a substantial part of the change.

The risk interaction is more revealing than the average.