The Real Lesson: Preserve the Franchise, Not Every Loan
The Banco Popular–Santander case answers the central question of this series in a qualified way: a failed-bank sale can preserve credit without preserving every loan because it transfers a functioning franchise into a new balance sheet, and the new owner can protect selected relationships while other lenders retrench and other parts of its portfolio absorb the constraint. The relevant test is therefore not whether Santander kept every facility unchanged. It is whether the resolution preserved enough lending capacity and economically important relationships to prevent a broad real-economy disruption, and what conditions made that selective continuity possible.
The evidence supports that narrower conclusion. Banco Popular’s sudden liquidity failure led to a rapid sale-of-business resolution on 7 June 2017. The SRB and FROB transferred the business to Santander after private capital claims were written down, without public funds, a bridge bank, or an asset-management vehicle. Banks outside the transaction reduced lending to riskier inherited borrowers. Santander broadly maintained the inherited portfolio and gave its strongest relative support to the risky firms most exposed to the outside withdrawal. At the same time, Santander’s capital position deteriorated, and its existing riskier exposures evolved less favorably. Firm-level total credit and key real outcomes were largely insulated in the observed sample, but that aggregate result coexisted with a real reallocation of risk and capacity.
The outcome was a three-part alignment
The resolution’s effect cannot be assigned to the sale alone. Three relationships had to interact. The first was the relationship between the failed bank’s franchise and its borrowers. Banco Popular was a major Spanish bank and a leading SME lender. Its value to Santander was not exhausted by the accounting value of the transferred assets. It also included access to a substantial customer base, local lending presence, information about firms, and opportunities to deepen relationships. A buyer that let those customers disappear immediately could destroy part of what it had acquired.
The second relationship was between inherited borrowers and competing lenders. Banks outside the transaction did not receive the same franchise or the same institutional reason to preserve it. After the resolution, they reduced credit to Banco Popular borrowers, particularly those judged riskier before the event. The estimated reduction was about 5% relative to safer borrowers, with credit declining by roughly 2% per quarter during the following year. This was not a general statement about every bank or every loan. It was a risk-selective response concentrated in the failed-bank segment.
The third relationship was between Santander’s preservation incentive and its capital capacity. Santander’s SME loan-market share rose from 11.1% to 24.8%, giving it a commercial reason to protect the acquired platform. But its CET1 ratio fell by about 114 basis points, remained under pressure relative to other major Spanish banks, and required a €7 billion capital raise on 27 July 2017. Santander could not treat the enlarged portfolio as if the acquisition had not changed its own constraints. Protecting an inherited relationship used capacity that could have supported a different borrower.
The interaction of these relationships explains the apparent paradox in the evidence. Santander gave stronger relative support to risky inherited borrowers even though they were more difficult to assess and more likely to consume capital. The reason is not that risk became irrelevant. Risky inherited borrowers were precisely the firms most vulnerable to competing-bank withdrawal. If they failed or moved to rivals, Santander could lose both the relationship and the future value of the acquired franchise. Preserving the relationship could therefore be commercially rational even while the bank reduced or slowed lending to riskier pre-existing customers.
That is the difference between preserving a franchise and preserving every loan. A franchise is a network of capabilities and relationships that can continue generating value. It is not a promise that every exposure in the network will remain at its previous amount, maturity, collateral level, or price. In Banco Popular’s case, the network survived through a selective allocation of Santander’s capacity. Inherited relationships were protected more strongly than Santander’s existing risky relationships, while competing banks withdrew from part of the same inherited population.
The firm-level outcome shows why averages must be interpreted alongside distributions. Total credit to Banco Popular borrowers was broadly unaffected by exposure to the resolution. Riskier, more exposed firms experienced relatively stronger total-credit dynamics, and firms with more banking relationships were better able to smooth disruption. Sales and employment did not significantly deteriorate in the annual data; investment improved for riskier, more exposed firms, and cash holdings did not indicate broad financial stress.