Banco Espirito Santo SA split into “good” and “bad” banks amid a 4.9-billion-euro bailout

The central bank of Portugal was reported to have taken control of Banco Espirito Santo SA, which used to be the biggest bank by market value in the country. Banco Espirito Santo SA has been divided into “good” and “bad” banks as part of a bailout that will cost 4.9 billion euros (6.6 billion dollars).

As reported by the Telegraph, the Governor of the central bank – Mr. Carlos Costa commented: “There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system.” Mr. Costa explained for the Financial Times, that “Nothing will change for clients.”

It was also reported that the deposit-taking operations of Banco Espirito Santo are to be transferred by the Bank of Portugals Resolution Fund to a new company – Novo Banco, meaning new bank. Banco Espirito Santo has been recently dealing with some problems after regulatory authorities revealed potential losses of loans to other companies associated to the Espirito Santo family. The bank was forced to take the bailout, which has been said that would destroy much of the investments value made by equity and subordinated debt holders.

The “good” assets of the bank have been purchased by a small Portuguese bank rescue fund, and a total of 4.9 billion euros in fresh capital is to be invested in the “healthy” assets.

The Finance Ministry of the country made a statement, which was cited by Bloomberg: “Shareholders, subordinated debt holders as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee.”

Last Thursday the share price of Banco Espirito Santo SA declined by 42%, and by a further 40% on the next day. The stock of Banco Espirito Santo was suspended from trading on August 1st after the shares of the bank collapsed by about 73% in Lisbon trade last week and slumped to 12 cents per share. About 89% of the banks value was lost since it got a capital increase in June 2014, which amounted to 1.04 billion euros. The market value of the bank was last estimated at 675 million euros.