Banking Law and Critical Infrastructure: Emergency Banking in Spain

Spain does not generally use a separate legal category called “emergency banking” in the way that some constitutional systems use emergency legislation. Instead, banking emergencies are dealt with through a combination of banking-supervision law, crisis-management and resolution law, EU Banking Union rules, deposit-guarantee mechanisms, and—where necessary—general emergency powers of the State.

The most important modern Spanish example is the 2017 resolution of Banco Popular Español, which provides an excellent case study of how emergency intervention can protect the continuity of critical banking functions while imposing losses on shareholders and creditors.

1. What is “emergency banking”?

Emergency banking refers to extraordinary legal and regulatory measures taken when a bank is facing a serious liquidity, solvency or operational crisis that threatens:

• financial stability;
• continuity of essential banking services;
• payment and settlement systems;
• depositors;
• confidence in the banking system;
• or the wider economy.

The modern approach is not necessarily to rescue the bank with public money. Instead, the law seeks to ensure that the bank's critical functions continue while shareholders and creditors absorb losses according to the statutory hierarchy.

This distinction is particularly important in Spain because Spanish banking law operates within the EU Banking Union.

2. Critical infrastructure and banking

A bank can be regarded as part of critical financial infrastructure because its failure can disrupt functions on which society and the economy depend.

Examples include:

1. Payment services
   • transfers;
   • card payments;
   • direct debits;
   • salary payments.
2. Deposit-taking
   • access to current accounts;
   • cash withdrawals;
   • protection of retail depositors.
3. Clearing and settlement
   • securities transactions;
   • interbank payments;
   • settlement systems.
4. Credit intermediation
   • business financing;
   • mortgages;
   • working-capital facilities.
5. Financial-market infrastructure
   • links between banks, central banks and financial institutions.

Consequently, banking resolution law focuses heavily on the continuity of critical functions, rather than merely determining whether shareholders should be compensated.

This principle was expressly relevant in the Banco Popular resolution. The EU General Court recorded that the SRB considered resolution necessary to achieve, among other objectives, the continuity of the bank's critical functions and the avoidance of significant adverse effects on financial stability.

3. Legal framework applicable in Spain

The Spanish system should be understood at three levels.

A. European Union law

The central instrument is:

Regulation (EU) No 806/2014, establishing the Single Resolution Mechanism (SRM).

It created a common framework for resolving failing banks in participating Banking Union Member States.

The principal institution is the:

Single Resolution Board (SRB).

For significant Spanish banks under ECB supervision, the SRB can take the principal resolution decision.

B. Spanish law

Spain implemented the EU crisis-management framework through its banking resolution legislation, principally:

• Law 11/2015 on the recovery and resolution of credit institutions and investment services companies;
• related implementing regulations;
• legislation governing the Fondo de Reestructuración Ordenada Bancaria (FROB);
• deposit-guarantee legislation;
• general banking-supervision legislation.

FROB has an important role in implementing resolution decisions in Spain.

C. Constitutional and general emergency powers

Spain's Constitution contains general mechanisms for exceptional situations, including:

• state of alarm;
• state of exception;
• state of siege.

However, these should not be confused with ordinary banking resolution.

A bank does not have to be placed under a constitutional state of emergency merely because it is failing.

The normal banking-resolution framework is specifically designed to address financial emergencies.

4. The concept of “failing or likely to fail”

A crucial concept under the EU resolution framework is “failing or likely to fail” (FOLF).

The resolution process can be triggered where the competent authority determines that the institution is failing or is likely to fail.

This can occur, for example, where:

• the bank cannot pay its debts when due;
• liabilities exceed assets in the relevant circumstances;
• regulatory requirements are seriously breached;
• the bank requires extraordinary public financial support;
• or there are objective indications that failure is imminent.

The Banco Popular case provides a particularly clear example.

On 6 June 2017, the ECB communicated to the SRB that Banco Popular was failing or likely to fail because it could not meet its liabilities as they fell due, or there were objective elements indicating that it would soon be unable to do so.

5. The three principal conditions for resolution

Under the SRM framework, resolution generally requires three basic elements.

1. The institution is failing or likely to fail

This is the financial-distress requirement.

2. There is no reasonable private alternative

The authorities must consider whether other measures could prevent the failure within a reasonable period.

3. Resolution is necessary in the public interest

Resolution must serve the statutory objectives better than ordinary insolvency proceedings.

These objectives include:

• protecting critical functions;
• avoiding serious adverse effects on financial stability;
• protecting public funds;
• protecting covered depositors;
• protecting client assets and funds;
• minimising unnecessary destruction of economic value.

The Banco Popular judgment confirms that the SRB applied these considerations in deciding that resolution was necessary.

6. Emergency intervention does not necessarily mean nationalisation

One of the most important developments in modern banking law is the movement away from the traditional assumption:

“If a major bank fails, the government must rescue it.”

Modern resolution law instead attempts to achieve an orderly failure.

The authorities may use tools such as:

Sale of business

The viable part of the bank can be transferred to another institution.

Bridge institution

Critical operations can temporarily be transferred to a publicly controlled bridge bank.

Asset separation

Certain assets can be transferred to an asset-management vehicle.

Bail-in

Shareholders and certain creditors absorb losses by:

• write-down;
• cancellation;
• conversion into equity.

For Banco Popular, the principal resolution tool was the sale-of-business tool.

7. Banco Popular: the leading Spanish case study

Banco Popular Español, 2017

The Banco Popular episode is probably the most important modern Spanish example for an examination question on emergency banking + critical infrastructure + banking resolution.

Banco Popular was a Spanish credit institution under direct prudential supervision by the ECB.

On 7 June 2017, the SRB adopted its resolution decision. The Commission endorsed the resolution scheme on the same day.

The Spanish FROB subsequently adopted the necessary measures to implement the resolution decision in Spain.

The bank was ultimately transferred through the sale-of-business mechanism to Banco Santander.

The transaction allowed banking operations to continue rather than allowing an uncontrolled collapse.

8. Why was Banco Popular treated as a critical banking emergency?

The key legal concern was not simply:

“Is Banco Popular insolvent?”

The broader question was:

What would happen to financial stability and critical banking functions if Banco Popular failed without an orderly resolution?

The SRB concluded that resolution was necessary to:

• maintain critical functions;
• avoid significant adverse effects on financial stability;
• achieve the statutory resolution objectives.

The General Court expressly recorded those findings in its judgment.

This illustrates the fundamental philosophy of modern resolution law:

bank failure may be permitted, but uncontrolled disruption of critical functions should not be.

9. Case law: Fundación Tatiana Pérez de Guzmán el Bueno v SRB

Case

Case T-481/17, Fundación Tatiana Pérez de Guzmán el Bueno and SFL v Single Resolution Board

Judgment of the General Court, 1 June 2022.

The case concerned challenges to the Banco Popular resolution decision.

The applicants challenged, among other things:

• the resolution procedure;
• the right to be heard;
• the right to property;
• the reasoning given by the SRB;
• the legality of the resolution scheme.

The General Court ultimately dismissed the action.

The judgment is particularly important because it examines how emergency resolution powers interact with fundamental rights.

10. Right to property versus financial stability

A particularly significant legal issue was the shareholders' and creditors' right to property.

Resolution can dramatically affect private property because shareholders may lose their investment and creditors may suffer losses.

The legal question is therefore:

Can the State/EU resolution authorities interfere with property rights in order to preserve financial stability?

The answer is yes, provided that the statutory and fundamental-right requirements are satisfied.

The Banco Popular litigation demonstrates that property rights are not absolute in the context of bank resolution.

The Court considered the challenges based on the right to property and ultimately did not annul the resolution scheme.

11. Right to be heard in an emergency

Another important principle is procedural fairness.

Ordinarily, a person affected by an administrative decision should have an opportunity to present observations.

But bank resolution presents a special problem.

Suppose regulators announce:

“We are considering resolving the bank tomorrow.”

That announcement could itself cause:

• deposit withdrawals;
• loss of market confidence;
• bank runs;
• further liquidity deterioration;
• collapse of the bank before the decision is made.

Therefore, ordinary administrative procedures cannot necessarily operate in exactly the same way.

The Banco Popular litigation considered the compatibility of the resolution process with the right to be heard. The General Court ultimately upheld the resolution scheme.

This produces an important legal principle:

Emergency financial intervention may justify accelerated or restricted procedural arrangements where delay itself threatens the objective of the resolution.

But that does not mean procedural rights disappear altogether.

12. Transparency versus financial stability

Banking resolution also creates a difficult tension between:

Transparency

Shareholders, creditors and markets need information about the bank.

and

Confidentiality

Premature disclosure of:

• liquidity problems;
• valuation information;
• resolution plans;
• negotiations with potential purchasers;

could accelerate a bank run.

The Banco Popular litigation demonstrates why the resolution framework contains special rules governing information and access to documents.

This is an important feature distinguishing financial emergency law from ordinary administrative law.

13. The “no creditor worse off” principle

One of the most important safeguards is the No Creditor Worse Off (NCWO) principle.

In simplified terms:

A creditor should not ultimately receive less through resolution than it would have received if the bank had instead been liquidated under normal insolvency proceedings.

This protects creditors against arbitrary destruction of value through resolution.

If an independent valuation subsequently establishes that a shareholder or creditor was worse off because of resolution than it would have been in liquidation, compensation mechanisms may become relevant.

Thus, emergency resolution does not mean unlimited governmental power over private property.

14. Bail-in and the hierarchy of losses

Modern banking law attempts to ensure that losses fall first on those who voluntarily invested in the bank.

A simplified hierarchy is:

Shareholders → subordinated creditors → other eligible creditors → public funds

subject to the detailed statutory hierarchy and exclusions.

The policy is known as bail-in.

It aims to prevent the classic problem of:

“Privatise profits, socialise losses.”

The resolution framework therefore seeks to make shareholders and creditors bear appropriate losses before taxpayers.

15. Deposit protection

Ordinary retail depositors receive substantial protection through the deposit-guarantee system.

In the EU, covered deposits are generally protected up to:

€100,000 per depositor per bank.

This is important for critical infrastructure because maintaining confidence among ordinary depositors helps prevent bank runs.

The deposit-guarantee system is therefore part of the broader architecture of financial stability.

16. Relationship between emergency banking and critical infrastructure

The connection can be expressed as follows:

Bank distress

↓

Risk to liquidity and confidence

↓

Potential disruption of critical banking functions

↓

Risk to payment system / depositors / financial markets

↓

Regulatory intervention

↓

Recovery or resolution

↓

Continuation of critical functions

↓

Orderly exit or restructuring of the failed institution

This is the central logic of modern banking emergency law.

17. Important distinction: recovery vs resolution

This distinction is frequently tested in law examinations.

Recovery

The bank attempts to save itself.

Examples:

• raising capital;
• selling assets;
• obtaining private financing;
• restructuring liabilities.

Resolution

Authorities intervene because ordinary recovery is no longer sufficient and the bank is failing or likely to fail.

Resolution aims to:

• preserve critical functions;
• maintain financial stability;
• allocate losses;
• avoid disorderly insolvency;
• minimise reliance on public money.

18. Important institutions in Spain

Banco Popular demonstrates the interaction between these institutions. The ECB identified the bank as failing or likely to fail, the SRB adopted the resolution scheme, the Commission endorsed it, and FROB implemented the necessary Spanish measures.

19. Other relevant case-law themes

The Banco Popular litigation was not a single isolated case. Several actions were brought before the EU courts challenging the resolution.

The General Court decided a group of significant Banco Popular cases on 1 June 2022, including:

• T-481/17 — Fundación Tatiana Pérez de Guzmán el Bueno and SFL v SRB
• T-510/17 — Del Valle Ruiz and Others v Commission and SRB
• T-523/17 — Eleveté Invest Group and Others v Commission and SRB
• T-570/17 — Algebris (UK) and Anchorage Capital Group v Commission and SRB
• T-628/17 — Aeris Invest v Commission

The Court of Justice's official press release states that the actions seeking annulment of the Banco Popular resolution scheme and/or the Commission decision endorsing it were dismissed in their entirety.

20. Constitutional dimension

The Spanish Constitution is relevant principally through the protection of:

• property rights;
• equality;
• judicial protection;
• legality;
• proportionality;
• governmental accountability.

However, the strongest legal framework for a banking crisis is generally the specialised EU and Spanish banking-resolution framework, rather than the constitutional state-of-emergency regime.

This distinction is crucial.

Constitutional emergency

Concerned with exceptional threats to the constitutional/public order.

Banking resolution emergency

Concerned with:

• failing financial institutions;
• financial stability;
• critical economic functions;
• depositor protection;
• orderly allocation of losses.

The two regimes can theoretically interact, but they are legally distinct.

21. Critical assessment

The Spanish/EU model has several advantages.

Advantages

1. Protection of financial stability

It can prevent an uncontrolled bank collapse.

2. Protection of critical functions

Payment and deposit functions can continue even if the institution itself fails.

3. Reduction of taxpayer exposure

Bail-in places losses on investors rather than automatically on the public.

4. Speed

Resolution can be executed extremely quickly, which is essential when a bank is experiencing a liquidity run.

5. European coordination

The SRM avoids purely national responses to major cross-border banks.

Problems and criticisms

There are also serious concerns.

1. Limited procedural participation

The urgency of resolution can restrict shareholders' ability to participate before the decision.

2. Valuation disputes

Determining what a failed bank was actually worth is extremely difficult.

3. Property-right concerns

Shareholders can lose their entire investment.

4. Transparency

Too much disclosure may destabilise the bank; too little may undermine confidence in the legality of the process.

5. Judicial review after the event

Courts may only be able to examine the legality after the resolution has already occurred.

These tensions were central to the Banco Popular litigation.

22. Conclusion

The Spanish model of emergency banking demonstrates a fundamental change in banking law.

The objective is no longer simply:

“Save the bank.”

Instead, the objective is:

“Protect the financial system and critical banking functions while allowing an unsustainable institution to fail in an orderly manner.”

The Banco Popular resolution of 2017 is the leading practical illustration. The ECB determined that Banco Popular was failing or likely to fail; the SRB adopted a resolution scheme; the Commission endorsed it; and FROB implemented the necessary measures in Spain. The resolution sought to preserve critical functions and financial stability while allocating losses within the resolution framework.

The subsequent Banco Popular case law, particularly T-481/17, is important for understanding the relationship between emergency resolution powers and property rights, the right to be heard, procedural safeguards, judicial review and the obligation to give reasons.

Key cases to cite in an examination:

1. Fundación Tatiana Pérez de Guzmán el Bueno and SFL v SRB, T-481/17, General Court, 1 June 2022. 
2. Del Valle Ruiz and Others v Commission and SRB, T-510/17. 
3. Eleveté Invest Group and Others v Commission and SRB, T-523/17. 
4. Algebris (UK) and Anchorage Capital Group v Commission and SRB, T-570/17. 
5. Aeris Invest v Commission, T-628/17