Spanish banking giant Santander has stepped in to the rescue ailing rival Banco Popular by taking over the failing lender for €1 in a watershed deal masterminded by EU regulators to avoid a damaging collapse.

Santander will tap its shareholders for €7bn in a rights issue to raise the capital needed to shore-up Popular’s finances in a dramatic private sector rescue of Spain’s sixth-largest lender.

It will inflict losses of approximately €3.3bn on bond investors and shareholders but crucially will avoid a taxpayer bailout.

“This deal is good for Spain and it's good for Europe,” said Ana Botin, Santander’s chairman and one of the banking industry’s most influential figures.

Santander has a track-record of buying up troubled lenders, a strategy that has transformed it into a major player in the UK banking market.

In 2008 it took over struggling Alliance & Leicester for £1.3bn and also acquired the savings book of collapsed Bradford & Bingley. Thirteen years ago it also bought troubled Abbey National for £8bn.

The last-ditch Popular rescue is significant because it marks the first big test of the Single Resolution Board (SRB), the Brussels body that was established two and a half years ago to deal with banking meltdowns in a way that shields taxpayers.