Banking Law and Insolvency Law for Financial Institutions in Spain

1. Introduction

The insolvency of a bank or other financial institution is fundamentally different from the insolvency of an ordinary commercial company. A normal company can often enter insolvency proceedings while its assets are collected, creditors submit claims, and the business is reorganised or liquidated. A bank, however, holds deposits, provides payment services, supplies credit, and may be closely connected with the wider financial system.

For this reason, Spain uses a special recovery and resolution framework for credit institutions and certain investment firms, operating alongside the general Spanish insolvency regime.

The principal Spanish legislation has included:

Law 11/2015 of 18 June on the recovery and resolution of credit institutions and investment firms;

Royal Decree 1012/2015, implementing significant aspects of Law 11/2015;

Spain's general insolvency legislation, principally the consolidated Insolvency Law;

EU Directive 2014/59/EU, commonly known as the Bank Recovery and Resolution Directive or BRRD; and

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

Spain is also part of the EU Banking Union. Consequently, the European Central Bank, Single Resolution Board, Bank of Spain, FROB and other competent authorities may have different responsibilities depending upon the institution and the type of financial distress involved.

2. Why Banks Require a Special Insolvency Regime

Ordinary insolvency law primarily seeks an orderly treatment of the debtor and its creditors.

Bank insolvency has additional public-interest concerns.

A bank failure can affect:

depositors;

payment systems;

lending markets;

financial-market confidence;

other financial institutions;

businesses dependent on credit;

financial stability; and

public finances.

A sudden closure may therefore create consequences extending far beyond the bank's shareholders and creditors.

Banking law consequently attempts to intervene before conventional liquidation becomes the only available solution.

The important distinction is between ordinary insolvency and bank resolution.

3. Ordinary Insolvency and Bank Resolution

These concepts should not be treated as identical.

Ordinary insolvency

Ordinary insolvency proceedings focus on a debtor that cannot regularly satisfy its obligations. Depending upon the circumstances, the process may lead to restructuring or liquidation.

Creditors are generally treated according to statutory priorities.

Bank resolution

Resolution is an administrative crisis-management procedure specifically designed for financial institutions.

Its objectives include:

maintaining critical banking functions;

limiting serious disruption to financial stability;

protecting covered depositors;

avoiding unnecessary destruction of value; and

reducing reliance on extraordinary public financial support.

Thus, a financially distressed bank does not automatically follow exactly the same route as an ordinary insolvent corporation.

4. Law 11/2015

Law 11/2015 was a central piece of Spain's bank recovery and resolution framework and implemented major elements of the BRRD into Spanish law.

The legislation established mechanisms for dealing with financial institutions experiencing serious difficulties.

Its framework distinguishes broadly between:

preventive measures → early intervention → resolution.

This allows authorities to respond at different stages of financial deterioration.

The underlying idea is important: regulators should not necessarily wait until a bank has completely collapsed before acting.

5. Recovery Planning

Banks may be required to prepare recovery plans explaining how they could restore their financial position following severe deterioration.

Possible recovery measures can involve:

raising capital;

reducing risk;

selling assets;

restructuring operations;

obtaining liquidity;

reducing costs; and

changing business activities.

Recovery planning is intended to occur before actual failure.

It therefore represents the first line of defence against financial-institution insolvency.

6. Resolution Planning

Authorities also prepare for the possibility that recovery will fail.

Resolution planning examines how a financial institution could be reorganised, transferred or wound down without creating unacceptable disruption.

Important questions include:

Which activities are critical?

Could part of the institution be sold?

What liabilities could absorb losses?

Are there operational obstacles to resolution?

Could depositors continue accessing essential services?

Could resolution occur without taxpayer support?

Resolution planning therefore converts bank insolvency from an entirely reactive process into a planned regulatory process.

7. When Resolution Can Be Used

Under the EU resolution framework, resolution generally requires satisfaction of important conditions.

First, the institution must be failing or likely to fail.

Second, there must normally be no reasonable prospect that private-sector or supervisory measures would prevent failure within an appropriate period.

Third, resolution must be necessary in the public interest.

The public-interest requirement is crucial.

Not every failing bank necessarily requires resolution. If ordinary insolvency proceedings can adequately achieve the relevant objectives, resolution should not simply replace insolvency law without justification.

8. Meaning of “Failing or Likely to Fail”

A bank can potentially be considered failing or likely to fail in circumstances involving matters such as:

serious regulatory-capital problems;

assets falling below liabilities;

inability to pay debts or other liabilities as they fall due; or

circumstances indicating that such problems are likely to arise.

This concept allows authorities to intervene before conventional insolvency becomes irreversible.

That preventive capacity is one of the major differences between financial-resolution law and ordinary corporate insolvency.

9. Resolution Authorities in Spain

Spain's framework must be understood within the European Banking Union.

Important institutions include:

FROB

Spain's executive resolution authority has an important role in implementing resolution measures and cooperating with European authorities.

Bank of Spain

The Bank of Spain has important supervisory and resolution-related responsibilities within the applicable Spanish and European institutional framework.

Single Resolution Board

For institutions falling within its jurisdiction, the Single Resolution Board operates at Banking Union level.

European Central Bank

The ECB performs prudential supervisory functions concerning significant credit institutions within the Single Supervisory Mechanism.

These institutions may therefore become involved at different stages of a banking crisis.

10. Main Resolution Tools

The resolution regime provides authorities with powerful mechanisms unavailable in ordinary insolvency proceedings.

A. Sale of Business

All or part of a failing institution's business can be transferred to a purchaser.

This can preserve important banking activities while transferring them to a financially stronger institution.

The Banco Popular resolution provides the most important Spanish example.

B. Bridge Institution

Authorities may transfer assets, rights or liabilities to a temporary institution.

The bridge institution maintains critical operations while authorities seek a permanent solution.

This prevents essential financial services from disappearing simply because the original institution has failed.

C. Asset Separation

Certain problematic assets may be transferred to a specialised asset-management vehicle.

Separating impaired assets can make the remaining banking operations easier to restructure.

However, asset separation must be carefully controlled because transferring poor assets away from a bank can affect creditors and create valuation problems.

D. Bail-In

Bail-in represents one of the most significant reforms of modern bank-resolution law.

Instead of automatically using public money to absorb losses, qualifying shareholders and creditors may bear losses through mechanisms such as:

write-down → conversion → recapitalisation.

For example, qualifying debt may, where the statutory conditions are satisfied, be written down or converted into equity.

The objective is to make investors bear losses according to the resolution framework rather than automatically transferring those losses to taxpayers.

11. Shareholders and Creditors

An important principle of bank resolution is that shareholders generally absorb losses before creditors according to the applicable hierarchy.

Creditors then bear losses according to their ranking and the resolution rules.

However, resolution law also contains safeguards.

One of the most important is commonly described as:

“No Creditor Worse Off”

The principle broadly protects creditors against being left in a worse financial position through resolution than they would have occupied under the relevant counterfactual ordinary insolvency proceeding.

Valuation therefore becomes extremely important.

Authorities need to determine both the value of the institution during resolution and, where applicable, what creditors would have received under normal insolvency proceedings.

12. Depositor Protection

Bank insolvency law also gives special importance to depositors.

Covered deposits receive protection through the applicable deposit-guarantee framework.

This has two purposes.

First, it protects eligible depositors within statutory limits.

Second, it contributes to financial stability by reducing the danger that depositors will immediately withdraw money merely because they fear losing everything if a bank fails.

Depositor protection therefore operates alongside resolution law rather than being entirely separate from it.

13. Banco Popular as the Central Spanish Example

The 2017 resolution of Banco Popular Español SA is the leading practical example for understanding the interaction between banking law, resolution and insolvency principles in Spain.

Banco Popular experienced a severe deterioration in its liquidity position.

On 6 June 2017, the ECB determined that Banco Popular was failing or likely to fail.

The Single Resolution Board subsequently adopted a resolution scheme.

Capital instruments were written down or converted, and the institution was transferred to Banco Santander for €1.

The transaction became the first major application of the Single Resolution Mechanism and subsequently generated extensive litigation.

14. Case Law

The Banco Popular litigation has produced particularly important EU judgments directly connected with a Spanish financial institution.

The following cases provide more than six authorities relevant to financial-institution insolvency and resolution in Spain.

Case 1: Banco Santander (Resolution of Banco Popular), C-410/20, Judgment of 5 May 2022

Facts

Investors had acquired Banco Popular shares before the institution's resolution.

Following the resolution and total write-down of the shares, litigation arose concerning whether investors could pursue actions connected with allegedly defective information in the securities prospectus and seek remedies against Banco Santander as Banco Popular's successor.

Decision

The Court of Justice examined the relationship between investor-protection remedies and the EU bank-resolution framework.

It concluded, in the circumstances addressed, that the applicable resolution provisions prevented post-resolution actions for damages based on prospectus information or actions seeking nullity of the share-subscription agreement against the resolved institution or its successor after the relevant shares had been completely written down.

Importance

The case demonstrates that resolution measures can fundamentally alter pre-existing shareholder rights.

Resolution law cannot always be analysed using ordinary company and contract-law remedies alone.

Case 2: Aeris Invest v SRB, C-874/19 P, Judgment of 21 December 2021

This litigation concerned the valuation process following Banco Popular's resolution.

Aeris Invest argued, among other matters, about the requirement for a definitive ex-post valuation.

The Court considered the meaning and consequences of valuation requirements under the Single Resolution Mechanism.

Importance

The case demonstrates that valuation is central to resolution law.

Authorities frequently need to act extremely quickly during a banking crisis. Initial valuations may consequently be provisional.

Nevertheless, valuation affects:

shareholder losses;

creditor losses;

write-down decisions;

conversion decisions; and

potential compensation.

The judgment therefore illustrates the difficult balance between rapid crisis intervention and procedural safeguards.

Case 3: Fundación Tatiana Pérez de Guzmán el Bueno and SFL v SRB, T-481/17

This was one of the principal challenges concerning the Banco Popular resolution.

The applicants challenged the resolution arrangements on several legal grounds, including issues concerning:

the right to be heard;

property rights;

valuation;

reasons for the decision; and

the conditions governing resolution.

The General Court rejected the substantive challenge in its 2022 judgment.

Subsequent appellate proceedings further examined the institutional and procedural status of the resolution decision.

Importance

The litigation demonstrates that bank resolution must comply not only with financial legislation but also with fundamental principles of EU administrative law.

Emergency financial action remains subject to judicial scrutiny.

Case 4: Del Valle Ruiz and Others v Commission and SRB, T-510/17

Former Banco Popular shareholders and investors challenged aspects of the resolution.

The General Court rejected the action.

The case examined questions surrounding the legality of the resolution framework and the extensive powers exercised during the Banco Popular crisis.

Importance

The judgment illustrates the broad discretion available to resolution authorities when dealing with a rapidly deteriorating financial institution, while also showing that those powers remain subject to statutory conditions and judicial review.

Case 5: Eleveté Invest Group and Others v Commission and SRB, T-523/17

This was another major challenge arising from Banco Popular's resolution.

Investors sought annulment of the resolution-related measures and raised issues connected with the lawfulness of the intervention.

The General Court dismissed the action.

Importance

The decision reinforces the distinction between ordinary insolvency litigation and resolution litigation.

Resolution involves regulatory judgments about financial stability, public interest, valuation and the feasibility of alternatives.

Courts review those decisions within the specialised statutory framework governing bank resolution.

Case 6: Algebris (UK) and Anchorage Capital Group v Commission, T-570/17

Investors challenged the Banco Popular resolution and the Commission's endorsement of it.

The litigation examined aspects of the resolution decision, including valuation and procedural safeguards.

Importance

The case demonstrates how sophisticated investors and creditors can be directly affected by resolution powers.

Holding financial instruments issued by a bank does not guarantee protection from loss where those instruments fall within the statutory loss-absorption framework.

Case 7: Aeris Invest v Commission and SRB, T-628/17

This case formed part of the group of major actions challenging the Banco Popular resolution.

The General Court rejected the annulment action.

Importance

The judgment is particularly useful for understanding judicial scrutiny of resolution decisions and the relationship between:

financial stability + administrative discretion + valuation + property rights.

It confirms that the legality of resolution must be considered within the specialised EU bank-resolution system.

Case 8: Banco Santander (Resolution of Banco Popular II), Joined Cases C-775/22, C-779/22 and C-794/22, Judgment of 5 September 2024

These cases concerned investors who had subscribed for subordinated instruments associated with Banco Popular. Those instruments were converted into shares before the bank's resolution, after which the shares were written down.

The Court examined whether actions seeking nullity or compensation could proceed against Banco Santander.

The Court applied the bank-resolution framework to determine the consequences of the write-down and conversion measures.

Importance

The judgment further clarifies how resolution can affect private-law claims arising from financial instruments issued before a bank fails.

It demonstrates the priority given by EU resolution legislation to the effectiveness and finality of duly adopted resolution measures.

15. Insolvency Hierarchy and Resolution

Creditor ranking is essential in both ordinary insolvency and resolution.

In simplified terms, losses do not fall randomly.

The system distinguishes between different categories of:

shareholders;

capital instruments;

subordinated creditors;

ordinary unsecured creditors;

preferred claims;

covered deposits; and

secured or otherwise protected liabilities.

The exact legal ranking must be determined under the legislation applicable to the particular institution and claim.

Resolution authorities must respect statutory creditor hierarchy subject to the specific powers and safeguards contained in resolution legislation.

16. Resolution Versus Liquidation

Suppose a Spanish bank becomes financially unsustainable.

Two broad possibilities can arise.

Scenario A — Resolution is justified

If the institution provides critical functions and ordinary insolvency would threaten financial stability or fail to achieve the statutory resolution objectives adequately, resolution mechanisms may be employed.

The institution's business could therefore be transferred, recapitalised or restructured.

Scenario B — Resolution is not justified

If the public-interest test is not satisfied, ordinary insolvency proceedings may be the appropriate mechanism.

This distinction prevents resolution from becoming an automatic rescue mechanism for every unsuccessful financial institution.

17. Moral Hazard

A major objective of modern banking-resolution legislation is reducing moral hazard.

If bank investors believe that governments will always rescue a failing bank, they may tolerate excessive risk because taxpayers ultimately bear the losses.

Modern resolution rules attempt to reverse that incentive.

The general philosophy is:

private investment → private risk → shareholder/creditor loss absorption where legally applicable → public support only within strict legal conditions.

Bail-in is an important mechanism for implementing this philosophy.

18. Public Interest

Public interest is the dividing line between many resolution and insolvency cases.

Authorities consider whether resolution is necessary and proportionate to achieve statutory objectives that ordinary insolvency proceedings could not achieve to the same extent.

Relevant considerations can include:

continuity of critical banking functions;

financial stability;

contagion risk;

protection of public funds;

covered depositors; and

protection of client funds and assets.

Therefore, a bank's size alone does not provide the complete legal answer.

The authorities must consider the consequences of its failure and whether resolution objectives require special intervention.

19. Fundamental Rights

Resolution powers are extremely strong.

Authorities may:

write down shares;

convert financial instruments;

transfer assets;

transfer liabilities;

sell businesses; and

substantially alter investors' economic rights.

Consequently, fundamental-rights issues can arise, particularly concerning property rights, procedural protection, judicial review and proportionality.

The Banco Popular litigation demonstrates that emergency banking measures remain reviewable under EU law even though regulators require considerable freedom to act rapidly during a financial crisis.

20. Relationship With General Spanish Insolvency Law

General insolvency legislation remains important, but financial institutions operate within a special regulatory environment.

The relationship can broadly be expressed as:

Financial difficulty

↓

Recovery and supervisory measures

↓

Is the institution failing or likely to fail?

↓

Can private or supervisory measures prevent failure?

↓

If yes → recovery/private solution.

If no → assess public interest.

↓

Resolution necessary in public interest?

↓

Yes → special bank-resolution framework

No → ordinary insolvency/liquidation route, subject to applicable financial-sector rules

This illustrates why bank insolvency cannot be understood simply by reading general corporate insolvency legislation.

21. Cross-Border Dimension

Spanish banks frequently operate throughout the European Union and internationally.

A major bank may have:

branches in different Member States;

foreign subsidiaries;

cross-border creditors;

securities traded internationally; and

assets located in several jurisdictions.

Purely national insolvency proceedings could therefore produce fragmented outcomes.

The BRRD and Single Resolution Mechanism were designed partly to provide coordinated European crisis management.

For Banking Union institutions, national and EU authorities consequently need to cooperate.

22. Importance of Resolution Planning

One of the strongest lessons from modern financial crises is that authorities should not begin planning only after a bank has collapsed.

Resolution planning allows authorities to determine beforehand:

critical functions;

organisational structure;

eligible loss-absorbing liabilities;

operational dependencies;

possible purchasers;

information systems;

valuation arrangements; and

barriers to resolution.

This improves the possibility that an institution can fail without causing uncontrolled disruption to the wider economy.

23. Legal Position of Investors

Investors in banks occupy a different position from protected depositors.

Equity investment inherently involves risk.

Resolution law expressly contemplates situations in which shareholders can lose their entire investment.

Certain creditors and holders of capital instruments can also absorb losses according to statutory hierarchy.

The Banco Popular litigation demonstrates this clearly: the resolution involved the write-down and conversion of capital instruments before the resulting shares were transferred as part of the sale of the institution.

The subsequent litigation has largely concerned where resolution law draws the boundary between the finality of those measures and private-law remedies otherwise available to investors.

24. Advantages of the Spanish/EU Framework

The specialised system provides several advantages.

It allows early intervention, rather than requiring authorities to wait for complete insolvency.

It provides special resolution tools designed for financial institutions.

It protects critical banking functions.

It establishes mechanisms for shareholders and creditors to absorb losses.

It provides safeguards such as creditor hierarchy and the no-creditor-worse-off principle.

Finally, its integration with the European Banking Union provides mechanisms for dealing with cross-border institutions.

25. Continuing Challenges

The system nevertheless creates difficult legal questions.

One challenge is valuation. A failing bank must sometimes be valued within hours while its financial condition is rapidly changing.

Another is balancing financial stability and investor rights.

A third is determining when ordinary insolvency is genuinely inadequate and resolution is therefore justified in the public interest.

There are also difficulties involving cross-border creditors, deposit protection, derivatives, secured liabilities and complex corporate structures.

Finally, extensive Banco Popular litigation demonstrates that resolution may prevent immediate systemic disruption but generate substantial subsequent disputes concerning compensation, valuation and investor rights.

26. Key Case-Law Principles

The major authorities can be reduced to several principles:

Banco Santander, C-410/20: bank-resolution legislation can restrict private-law investor remedies following the complete write-down of shares.

Aeris Invest, C-874/19 P: valuation requirements and the legal consequences of provisional and definitive valuation are central to resolution.

Fundación Tatiana, T-481/17: resolution decisions raise issues involving property rights, procedural safeguards and judicial review.

Del Valle Ruiz, T-510/17: specialised resolution powers must be examined within the broader financial-stability framework.

Eleveté Invest, T-523/17: investor losses resulting from resolution are governed principally by the specialised resolution regime.

Algebris, T-570/17: sophisticated creditors and investors remain exposed to statutory loss-allocation mechanisms.

Aeris Invest, T-628/17: resolution measures remain subject to legality review despite the authorities' need to respond rapidly to financial crises.

Banco Santander II, C-775/22, C-779/22 and C-794/22: the consequences of resolution can extend to claims concerning subordinated instruments converted into shares before resolution.

27. Conclusion

Spanish law does not treat the failure of a financial institution in the same way as the failure of an ordinary commercial company.

The system combines general insolvency principles with a specialised bank recovery and resolution regime derived substantially from Spanish legislation and European Banking Union law.

The central distinction is between insolvency and resolution.

Ordinary insolvency focuses primarily on administering the debtor's financial failure according to insolvency rules. Resolution has the broader objective of dealing with a failing financial institution while preserving critical functions and protecting financial stability where intervention is justified in the public interest.

The Banco Popular resolution provides the clearest Spanish example. Its resolution involved the write-down and conversion of capital instruments and the transfer of the institution to Banco Santander. It subsequently generated extensive litigation before the EU courts.

The resulting cases demonstrate that modern bank insolvency law rests upon several connected principles:

early intervention → recovery planning → resolution planning → failing-or-likely-to-fail assessment → public-interest assessment → resolution tools or ordinary insolvency → creditor safeguards → judicial review.

Accordingly, the Spanish system attempts to achieve two objectives simultaneously: allowing a financial institution to fail without automatically protecting its investors from losses, while preventing that failure from unnecessarily destabilising depositors, essential banking functions and the wider financial system.