Banking Law and Financial Crisis Propagation Networks in Spain

Introduction

Financial crisis propagation networks describe the channels through which financial distress at one bank, market or financial institution can spread to other institutions and eventually affect the wider economy. In Spain, this issue became particularly important during and after the global financial crisis and the euro-area sovereign debt crisis.

Banks are interconnected through interbank lending, payment systems, derivatives, securities holdings, common borrowers, deposit markets and investor confidence. Consequently, the failure of one important institution can potentially create losses or liquidity pressures elsewhere.

Spanish banking law now addresses this problem through a combination of prudential supervision, capital and liquidity requirements, recovery planning, bank resolution, deposit protection and EU Banking Union mechanisms. Spain implemented the EU Bank Recovery and Resolution Directive principally through Law 11/2015 of 18 June on the recovery and resolution of credit institutions and investment firms and Royal Decree 1012/2015. A central objective of this framework is specifically to prevent bank failure from producing significant adverse effects on financial stability and spreading contagion through the financial system.

1. How Financial Crises Propagate Through Banking Networks

A banking crisis can spread through several interconnected channels.

Interbank Exposure

Banks routinely lend money to and maintain financial relationships with other banks.

If Bank A becomes insolvent and cannot repay Bank B, Bank B suffers a loss. If that loss is substantial enough, Bank B may itself face financial pressure.

The sequence can therefore become:

Bank failure → creditor-bank losses → capital deterioration → reduced lending → wider financial stress.

Liquidity Contagion

A bank can remain technically solvent while experiencing a severe shortage of liquidity.

If depositors or wholesale creditors fear failure, they may rapidly withdraw funding. Similar concerns can then spread to institutions perceived as having comparable weaknesses.

This makes confidence particularly important in banking.

Common Asset Exposure

Banks often invest in similar securities or lend to similar economic sectors.

When many institutions simultaneously sell the same assets to raise cash, market prices may decline sharply.

Falling prices then create additional losses for other institutions holding those assets.

This process is commonly described as fire-sale contagion.

2. Sovereign-Bank Connection

Spain's financial-crisis experience also illustrates the connection between banks and sovereign finances.

Banks can hold substantial government securities, while governments may simultaneously provide support to distressed financial institutions.

A deterioration in sovereign credit conditions can therefore reduce the value of assets held by banks. Conversely, large banking losses can increase pressure on public finances.

This interaction is often described as the bank-sovereign nexus.

The creation of the European Banking Union sought, among other objectives, to strengthen supervision and resolution mechanisms and reduce the destabilizing effects associated with national banking crises.

3. Real-Economy Propagation

Banking contagion does not remain confined to financial institutions.

When banks experience capital or liquidity problems, they may reduce lending to households and businesses.

The transmission mechanism can become:

banking losses → tighter credit → lower investment → weaker consumption → business failures → additional loan defaults.

Financial-crisis propagation is therefore important to banking law because systemic banking instability can eventually become an economy-wide problem.

4. Law 11/2015 and Crisis Containment

Spain's Law 11/2015 forms a central part of the modern crisis-management architecture.

Its resolution framework seeks to maintain critical banking functions while minimizing systemic disruption.

Resolution objectives include:

maintaining continuity of critical functions;

avoiding significant adverse consequences for financial stability;

preventing contagion;

protecting public resources;

protecting covered depositors;

protecting customer funds and assets.

These objectives reflect the principle that ordinary corporate insolvency procedures may not always be adequate for systemically important banks.

5. Recovery and Resolution Planning

Banks should not wait until insolvency before preparing for financial distress.

Recovery plans establish measures that institutions can take when their financial condition deteriorates.

Resolution planning addresses the different question of how authorities could manage the institution if recovery fails.

Authorities examine matters such as critical functions, organizational structure, funding arrangements, operational dependencies and obstacles to resolution.

The purpose is to prevent disorderly collapse from transmitting financial instability throughout the network.

6. Bail-In and Loss Absorption

Modern European resolution law seeks to ensure that bank losses are absorbed principally by appropriate shareholders and creditors rather than automatically by taxpayers.

The bail-in mechanism allows resolution authorities, subject to statutory rules, to write down or convert qualifying liabilities.

Banks are also subject to requirements concerning loss-absorbing resources, including the Minimum Requirement for Own Funds and Eligible Liabilities (MREL).

MREL is designed to provide resources capable of absorbing losses and recapitalizing a failing institution during resolution.

Banco de España explains that the resolution framework uses these mechanisms to protect financial stability and reduce reliance on public bailouts.

7. Deposit Protection and Contagion

Deposit protection has an important systemic function.

Without credible protection, depositors who observe the failure of one bank might withdraw funds from other banks, even where those institutions remain fundamentally sound.

Deposit-guarantee arrangements can therefore reduce the probability of panic-driven contagion.

The protection of covered depositors is expressly one of the objectives incorporated into Spain's resolution architecture.

Important Case Laws

1. Banco Santander SA v Commission and SRB – Banco Popular Resolution Cases

The resolution of Banco Popular Español in June 2017 provides the most important modern Spanish example of banking-crisis containment.

Banco Popular experienced severe liquidity stress. The European Central Bank determined that it was failing or likely to fail, after which the Single Resolution Board adopted a resolution scheme.

Its shares and relevant capital instruments were written down or converted, and the institution was transferred to Banco Santander.

The authorities considered the sale necessary in the public interest to preserve critical banking functions, protect depositors and maintain financial stability.

Principle: Resolution law allows authorities to intervene rapidly when the disorderly failure of a bank could threaten financial stability.

2. Banco Santander (Resolution of Banco Popular), C-410/20 – CJEU, 2022

This important case concerned investors who had acquired Banco Popular shares before the institution was resolved.

Following the total write-down of the shares, questions arose concerning whether investors could pursue actions connected with prospectus information and recover losses from Banco Santander as successor.

The Court interpreted the EU Bank Recovery and Resolution Directive in light of the effectiveness of the resolution measures.

Principle: Resolution measures can significantly affect pre-existing shareholder rights where necessary under the statutory resolution framework.

From a systemic-risk perspective, the case demonstrates that bank-resolution law deliberately creates exceptional mechanisms for allocating losses without permitting ordinary claims automatically to undermine the resolution.

3. Banco Santander (Resolution of Banco Popular II), Joined Cases C-775/22, C-779/22 and C-794/22 – CJEU, 2024

These cases involved subordinated obligations that had been converted into Banco Popular shares before resolution.

The Court considered claims seeking damages or nullity arising from allegedly defective information concerning the relevant financial instruments.

The Court confirmed important effects of the BRRD resolution framework concerning actions brought after the resolution decision.

Principle: Effective resolution requires legal certainty concerning which liabilities survive and which rights are affected by write-down and resolution measures.

This certainty is important because unresolved claims can complicate recapitalization and potentially undermine crisis containment.

4. Banco Santander (Resolution of Banco Popular III), C-687/23 – CJEU, 2025

This later judgment introduced an important distinction.

The dispute concerned rights arising from actions for nullity and damages that had been brought before Banco Popular entered resolution.

In September 2025, the Court held that rights arising from such actions brought before the resolution could be enforceable against Banco Santander under the circumstances addressed by the judgment.

Principle: Bank resolution does not permit every pre-existing legal claim to be disregarded. The timing and legal nature of the claimant's rights are important.

The decision demonstrates the balance between systemic crisis management and protection of established creditor and investor rights.

5. Del Valle Ruíz and Others v Single Resolution Board – General Court, Joined Cases T-302/20, T-303/20 and T-307/20

These proceedings concerned former Banco Popular shareholders and creditors seeking compensation following resolution.

The disputes involved the “no creditor worse off” safeguard.

The relevant comparison was between the treatment actually received under resolution and the treatment claimants would have received under normal insolvency proceedings.

The General Court concluded that the affected shareholders and creditors in the cases before it were not entitled to compensation from the Single Resolution Fund because they would not have obtained better treatment in ordinary insolvency.

Principle: Crisis-resolution powers are accompanied by safeguards designed to prevent affected shareholders and creditors from receiving less than they would have obtained under the applicable insolvency counterfactual.

6. Molina Fernández v Single Resolution Board, T-304/20

This was another significant challenge connected with the Banco Popular resolution and subsequent compensation determination.

The applicant challenged the SRB's determination concerning whether affected shareholders and creditors should receive compensation.

The General Court rejected the relevant compensation claim in the context of the valuation determining what claimants would have received under ordinary insolvency.

Principle: Independent valuation is central to determining whether resolution has improperly disadvantaged shareholders or creditors compared with normal insolvency.

Accurate valuation is therefore not merely an accounting exercise; it is a fundamental legal safeguard within systemic crisis management.

7. ACMO and Others v Single Resolution Board, T-330/20

This case also arose from the Banco Popular resolution and challenged the SRB's decision concerning compensation.

The General Court examined the treatment that affected investors would have received if Banco Popular had entered ordinary insolvency rather than resolution.

The challenge did not establish an entitlement to compensation from the Single Resolution Fund.

Principle: Resolution law attempts to reconcile rapid systemic intervention with protection against arbitrary destruction of creditor rights.

8. Galván Fernández-Guillén v Single Resolution Board, T-340/20

This proceeding formed another part of the litigation surrounding compensation after Banco Popular's resolution.

Again, the court addressed the statutory protection based upon comparison with hypothetical normal insolvency proceedings.

Principle: A financial-stability intervention remains subject to judicial review and creditor-protection safeguards.

This helps maintain confidence in resolution mechanisms while allowing authorities to act rapidly during a crisis.

8. Banco Popular as a Crisis-Propagation Example

Banco Popular demonstrates how modern resolution law attempts to interrupt a potential contagion chain.

The bank was experiencing serious liquidity stress when the ECB determined that it was failing or likely to fail. The SRB then transferred the institution to Banco Santander after the relevant write-down and conversion measures.

The transaction allowed Banco Popular's critical functions to continue and protected deposits without an ordinary taxpayer-funded rescue.

The intended containment mechanism can be summarized as:

liquidity crisis → failing-or-likely-to-fail determination → resolution → loss absorption → sale of business → continuity of deposits and critical functions → reduced systemic disruption.

9. Interbank Network Risk

Spanish regulators must also consider direct and indirect connections between institutions.

Direct connections include interbank loans, derivatives and payment obligations.

Indirect connections include common asset portfolios, similar funding sources and exposure to the same industries.

A financial network can therefore transmit distress even where two banks have no major direct contractual relationship.

Macroprudential supervision consequently considers the financial system as a network rather than simply examining every bank independently.

10. Systemically Important Institutions

Large and interconnected institutions receive particular regulatory attention because their failure can generate disproportionately large consequences.

Systemic importance can depend upon:

size;

interconnectedness;

complexity;

substitutability of critical services;

cross-border activities.

Additional loss-absorbing capacity and resolution planning can help reduce the external consequences of failure.

11. Payment-System Contagion

Banks are connected through payment and settlement infrastructure.

If one institution cannot satisfy payment obligations, liquidity pressures may affect counterparties waiting to receive those funds.

Modern banking regulation therefore treats resilient payment infrastructure as an important element of systemic stability.

Operational disruption, cyber incidents and liquidity crises can all potentially produce network effects.

12. Cyber Risk as a New Propagation Network

The concept of financial contagion now extends beyond traditional insolvency.

Banks frequently depend on common technology suppliers, cloud infrastructure, payment networks and financial-data services.

A serious cyberattack affecting a major common provider could therefore disrupt several institutions simultaneously.

This creates a new form of systemic interconnectedness:

shared technology → common vulnerability → simultaneous operational disruption → payment problems → liquidity/confidence effects.

Operational resilience has consequently become increasingly important within European financial regulation.

13. Climate Risk and Network Contagion

Climate-related financial risks can also propagate through banking networks.

For example, a severe physical event could simultaneously affect borrowers, insurers and banks exposed to the same geographic area.

Transition risks can similarly affect multiple institutions financing carbon-intensive industries.

The systemic issue is therefore not merely whether one loan fails but whether many institutions possess correlated exposures.

14. Artificial Intelligence and Model Correlation

Another emerging frontier concerns common AI and risk-management models.

If many banks use similar algorithms, similar market data and similar trading signals, they may respond to stress in similar ways.

For example, multiple institutions might simultaneously reduce exposure to the same assets.

That could amplify price declines.

Future financial-stability regulation may therefore need to consider not only financial interconnectedness but also algorithmic interconnectedness.

15. Cross-Border Crisis Propagation

Spanish banks operate within a deeply integrated European financial market.

A crisis originating outside Spain can reach Spanish institutions through funding markets, subsidiaries, securities holdings and counterparties.

Likewise, distress at a large Spanish institution could affect institutions elsewhere.

This explains the importance of the Single Supervisory Mechanism and Single Resolution Mechanism.

Banking Union recognizes that systemic banking networks cross national borders and that crisis management therefore cannot always be conducted effectively by national authorities acting independently.

Conclusion

Financial crisis propagation networks are a fundamental concern of modern Spanish banking law because bank failures can spread through interbank exposures, liquidity markets, common assets, payment systems, depositor confidence, sovereign exposures, technology dependencies and the real economy.

Spain's post-crisis framework—particularly Law 11/2015, recovery and resolution planning, MREL, deposit protection and participation in the European Banking Union—seeks to interrupt these contagion channels before an individual bank failure becomes a systemic crisis. Banco de España expressly identifies prevention of contagion and protection of financial stability among the objectives of the resolution regime.

The extensive Banco Popular litigation, including Banco Santander (Banco Popular I), Banco Popular II, Banco Popular III, Del Valle Ruíz, Molina Fernández, ACMO, and Galván Fernández-Guillén, demonstrates the central legal tension: authorities need sufficient powers to contain systemic crises rapidly, while shareholders and creditors remain entitled to the protections and judicial safeguards established by law.

The next frontier extends beyond conventional bank-to-bank contagion. Cyber dependencies, shared technology providers, climate exposures, AI-driven trading and cross-border digital finance can create new propagation networks. Spanish banking law must therefore increasingly approach systemic risk as a problem of interconnected financial, technological and operational networks rather than simply the solvency of individual banks.