Banco Santander has acquired its rival Banco Popular for one euro, becoming the leading bank in Spain.
Buying Banco Popular will cost Santander 7 billion euros – around 2 billion euros more than analysts had expected.
The troubled bank was described by the European Central Bank (ECB) as “failing or likely to fail” due to its dwindling cash reserves.
Banco Popular has struggled after billions in property investments turned sour.
The ECB said: “The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due.”
The Single Resolution Board (SRB) – the body set up last year to deal with winding up struggling banks – pushed forward the sale after it was informed of the seriousness of the problem last night.
Banco Popular executives have spent the last few months attempting to shore up the bank’s balance sheet by selling various assets.
A bidding process for Banco Popular ended last month, but started to look shaky as a handful of institutions pulled out.
Santander chairman Ana Botin said it was a good deal for the bank: “The combination of Santander and Popular strengthens the group’s geographical diversification at a time of improving economic conditions in both Spain and Portugal.”
However, shareholders appeared to disagree, with shares falling by 3% in early trading.
Banco Popular customers will be unaffected, and the ECB already protects all EU savers with deposits of up to 100,000 euros.
However, shareholders and bondholders will lose out as their investments become worthless.
The SRB was set up to deal with any struggling banks after the 2012 eurozone crisis threatened the economies of entire countries.
In Spain, banks had so much risky debt it worried investors buying sovereign wealth bonds, making borrowing by the country more expensive.
Government ministers were eventually forced to borrow 41 billion euros to prop up its lenders and reassure investors.
With the SRB in place, the risk is supposed to be taken off individual countries when a bank is struggling.
The body’s creation was also aimed at calming tensions, which led to protests and riots against banks in 2013.
Officials in Frankfurt at the ECB monitor the EU’s 125 biggest banks and the SRB steps in when a collapse looks likely.
They can either reorganize the bank’s structure, liquidate it or force through a sale – as they did with Banco Popular and Santander.
Banco Popular unveiled a 3.5 billion-euro loss last year as bosses continued to struggle to deal with nearly $40 billion of toxic property loans.
It launched three rounds of fundraising from investors over the last five years, raising a total of 5.5 billion euros.