Like any wounded animal, a bank can be dangerous. More dangerous than usual, that is. The fact is that the army of bank employees usually carries out their superiors’ orders without question, whether out of a lack of ethical concern; or out of a desire to climb the bank’s corporate ladder; or simply out of a survival instinct as an employee who cannot afford to be sacked; or a very sad combination of all three.
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Today we bring you a real-life example of what a Spanish bank like Banco Popular was capable of doing in the final months of its existence, before being «sold» for €1 to virtually the only entity capable of taking on such a financial black hole.
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The events we are about to describe were, as always, perpetrated against an inexperienced small business owner, who in this case applied for a loan to start up his small business. We are talking about a loan of around €100,000, for the approval of which the bank asked the customer for all the necessary personal and financial details of the business. So far, so normal. The bank employee, a friend of his (of course), gave him high hopes that the loan would be approved, as his personal credit history was good and the business viable, so the customer began to set up his business despite not having the final go-ahead.
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The surprise came a few weeks later, when his friend—the branch manager—confirmed the bad news that the delays had already led him to suspect: his loan application was not going to be approved, despite meeting the usual reasonable criteria. «Orders from above…» At that point, the problem for the client was enormous, as he would have to rush to another institution to secure financing and meet the commitments he had already made for his fledgling business. He also had to start the whole bank loan application process from scratch with unfamiliar bankers (not friends), and with no guarantee that the application wouldn’t also be rejected by that other bank. Nerves and insomnia took hold of the client and his family that first night, as you might expect.
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The next day, the chummy manager at the branch called them in again and told them there was a chance of getting approval under «certain conditions, which I’ll explain when you come in». The client discussed this with his partner, feeling noticeably relieved, and they agreed that they could expect the loan terms to be tightened at their next meeting with the banker. They immediately took out their laptop and, together with their partner, began to recalculate the business plan in anticipation of a rise in the interest rate, a reduction in the loan amount to just €75,000, and a shorter repayment term. With their homework done, and having accepted these new, manageable red lines for themselves and their business, the couple headed to their meeting with the manager full of hope.
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The surprise came when their friendly manager told them that, for their application to be approved, the loan couldn’t be for €100,000 or €75,000, but would have to be for the staggering sum of €150,000! ‘How is that possible? Does the bank want to lend us more money than we need for our business?’ asked the couple. ‘That’s right,’ replied the manager, ‘but on the condition that you use that surplus of 50,000 euros to buy shares in our bank. If you don’t accept these terms, unfortunately no loan will be approved.’
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As everyone knows, a few months later Banco Santander had to inject €13 billion on the very day it «bought» the bank, technically for 1 euro, and that Popular’s shares were immediately written off to zero. But the perversion and precariousness of the Spanish financial system is such that banks in distress prefer to run headlong into the problem by lending excessively to customers, knowing full well that this money will be thrown into a bottomless pit. And knowing, moreover, that this diabolical over-lending condemns a solvent customer to insolvency and will be almost impossible to recover.
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We are no longer talking about lending recklessly to customers to finance their dubious businesses, as happened with loans to property developers and builders during the property bubble; no. This is quite simply coercing customers with unsolicited money to finance the bank itself, which is on the brink of collapse, in order to keep it afloat for a few more months, weeks or days. Who cares if crimes are committed along the way and the lives of entrepreneurs who sustain the country with their taxes are ruined? Sadly, it seems that nobody does, at least nobody close to power or the financial system cares. Incidentally, the protagonists of this story signed up to the deal whilst their banker friend told them that, with a bit of luck, the shares would rise, as «they’re very cheap», and they would thus be able to repay their loan more comfortably. Obviously, they lost practically €50,000, which they will have to repay religiously, along with the other €100,000, suffocating their fledgling business and their lives beyond words.
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Some of you might say that this happens to those who choose the wrong banks to work with. It is true that most Spanish banks have a greater risk than that of other, more financially sound markets. And it’s not just a matter of securing finance; above all, investing through Spanish banks comes at the cost of the corresponding risk premium (which is why we still pay a positive rate on deposits here, whilst the most creditworthy institutions charge for them). But for the small business owner or investor, it is almost impossible to secure loans from more solvent foreign banks, and they are forced to finance themselves and invest in the ailing bank on the corner. The problem is that a dangerous animal, if wounded, is doubly lethal.