Co-op woes embarrass regulators and Treasury

Mailslot at Co-op Bank

For the wider Co-op group or movement, banking is turning into a hideously expensive business.

As the Co-op evaluates - in partnership with the newly created regulator, the Prudential Regulation Authority - how much additional capital it needs to find as a protection against losses, we will learn quite how expensive.

But the woes of the Co-op have the potential to be expensive, in a reputational sense - and not just for the Co-op's management.

Remember this is a bank that until only a few weeks ago was negotiating to buy 631 branches from Lloyds and thus treble in size.

And it was doing this with the blessing of the Treasury and chancellor of the Exchequer, who last year hailed the Co-op's expansion as creating "a new challenger bank" that would give "real choice to customers and supports the economy".

What's more, the regulator, the now disbanded Financial Services Authority, did not veto the Co-op's plan to massively expand - which looks a bit odd, now that the Co-op is assessing whether the costs of running its much smaller operation are affordable.

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The Co-op Bank's accounts should perhaps have given a pretty good warning of problems ahead”

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And it is not as though the Co-op's problems came out of a clear blue sky,

A couple of years ago, a financier planning a possible bid for Lloyds branches told me - and the FSA - that he did not believe that the Co-op was strong enough in a financial, management or IT sense to acquire the Lloyds branches and assets.

He was told by the FSA that the decision on the best bidder would be a "political one" not a regulatory one.


What's more, the Co-op Bank's accounts should perhaps have given a pretty good warning of problems ahead.

I looked at these in some detail over the weekend, and they make pretty grim reading.

Here is what stood out for me. At the end of 2011, the Co-op Bank had £1.45bn of corporate loans on its "watchlist". In other words, it thought that £1.45bn of lending to companies - much of it property lending - could go bad.

Why didn't that warning of potential trouble afoot ring stronger alarm bells for the Co-op Group's top management, or for Lloyds, or the FSA or the Treasury - all of whom might have wondered whether the Co-op was the best buyer of Lloyds's branches?

The point is that in the subsequent year, many of the companies with loans on the Co-op's watchlist did in fact default. Corporate loans in default at the Co-op jumped from £922m to just under £2bn.

And that rise in defaults was a big contributor to the colossal £674m loss that the Co-op incurred in 2012.

So here's another source of potential embarrassment for the now defunct FSA. Many of the loans that have gone bad at the Co-op were acquired when it bought the Britannia Building Society in 2009 - a takeover that was regarded by the FSA at the time as very helpful, because it apparently strengthened the Britannia.

What we now know is that the strengthening of the Britannia has weakened the Co-op.

So how much additional capital will the Co-op have to find for its bank?

The information in its latest accounts makes it difficult to be precise - except that the £800m it hopes to raise from the sale of its life and general insurance operations will not be enough (I am authoritatively told), so it may well be obliged to sell or mortgage some of its non-financial operations.

Here are what I regard as the important numbers.

At the end of 2012, the Co-op had £3.7bn of commercial loans, home loans and personal loans that it classified as impaired or bad. Against that, it was holding a provision for potential losses on these loans of £643m.

In other words the Co-op believes it will ultimately lose just 17% of these bad loans.

At the same time, the Co-op has loss-absorbing equity capital of £1.6bn.

Or to put it another way, impaired loans minus provisions for losses as a percentage of loss-absorbing capital is 194%.

Which is another way of saying the Co-op has a good deal of additional capital to find.

Are its woes wealth imperilling for its depositors and savers (or rather for those with more than the £85,000 insured limit)?

I think that is unlikely. As I said on Friday, the wider Co-op group has other assets it can sell to plug the hole.

And there's another thing. Having welcomed the Co-op's plan to buy Lloyds branches, and having therefore invested his personal capital in the Co-op, the chancellor can't afford for there to be a serious accident at that bank.

As I said on Radio 4's Today programme this morning, the Treasury will be working over time with the Prudential Regulation Authority to find an orderly way to ensure it continues to be business as usual for the Co-op's customers.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • Comment number 217.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 216.

    How many articles knocking the Co-op do you plan on writing, Robert? You must be heading for some sort of record.

    Presumably the BBC (and A. N. Others) pay you piece rates?

  • rate this

    Comment number 215.

    211 United

    'Government borrowing was completely normal in relation to GDP pre crash.'

    That's the excuse they used at the time to run 30bn deficits through a 'boom'.

    Money that, even with a debt-fuelled economy generating massive amounts of GDP and taxes, GB still had to borrow. Such was the massive public sector squanderfest Labour had created

    Now the Emperor is naked it's no excuse at all.

  • rate this

    Comment number 214.

    To add @208 - delve slightly deeper than the general media would like & it seems there are alot more dark secrets yet to come out about the what the banks were & still are up to.

    Probably next in line is the LIBOR-like ISDAfix scandal if the BBC et al actually decide to report this at all...

  • rate this

    Comment number 213.

    196. sw

    ..shows how desperate the authorities were to hive off the Lloyds branches.. didn't care what collateral damage would be caused on the acquiring bank.
    the branches are a 'forced sale' by the EU, if not, Lloyd's would keep them. Co-op were getting them at 30% off & more, they will now be floated. Moody's simply showed up why the Co-op have faffed around so long, the Co-op was weak!

  • rate this

    Comment number 212.

    @210 Gruntfuttock

    Thank you for posting this link. I feel like I've actually learnt something today.

  • rate this

    Comment number 211.

    #189 jgm2

    "Were they really taken in by Labour's spin that it was 'prudent' to borrow through a boom and that all the 'growth' was entirely normal and in no way an abomination caused by an ocean of borrowing (both govt and private)."

    Interesting spin.

    Government borrowing was completely normal in relation to GDP pre crash.

    Private borrowing? Don't you mean ocean of lending? 100bn for ABN AMRO?

  • rate this

    Comment number 210.

    @192 "How come property prices are rising when there is much default? Come on BBC tell us the truth."

    Good luck with that. . .

  • rate this

    Comment number 209.

    Mmmm, but are they out for Mutual assured destruction ?
    Are only private banks to be permitted in dis Topia ?

    Doctor Who, wasn't his name revealed in the Armageddon Factor with Tom Baker years ago ?

    Ooops !

  • rate this

    Comment number 208.

    And that is the problem.

    The "Co-op woes embarrass regulators and Treasury"

    Embarrass. Embarrass!

    In other words they are not bothered. Couldn't give a damn about what banks get up to but get embarrassed when they get into trouble on their watch.

    Meanwhile business as usual.

    Ripping us all off.

    Never mind though. We are getting distracted by EU exit.

    All to do with distractions and rip-off.

  • rate this

    Comment number 207.

    204 -it's all pointless tit for tat. NuLab thought they had come to an accommodation with the City after financial crises wrecked every single previous Labour administration

    Instead the City ran rings round them.

    HoC is full to the gunwales of people who work, or have worked in, financial services.

    It was the global banking crash of 07/8 & recession that destroyed our economy not Gordo

  • rate this

    Comment number 206.

    112. FauxGeordie
    96 - The politicos got the power...

    Feeble feeble feeble

    Remind me - who do they all go and work for after leaving office? Why goodness me its the financial services industry.
    Rumour has it a recent guest of HM is into the Green Energy sector - hmm, wasn't that the one he created when in power? - tut, tut, maybe we need to get serious about 'not right behaviour'.

  • rate this

    Comment number 205.

    "Good summary, especially "Everybody who borrowed to the hilt". Let's not forget everyone loved it at the time, businesses, politians AND the voting public. "Blaming the banks is lazy scapegoating"."

    Utter utter rubbish.

    UK govt & personal debt are STILL low by Western standards even post bailouts. But f. services external debt is 4X GDP making us the most indebted country in the world

  • rate this

    Comment number 204.

    #200 JustKBO; no problem. However I was not seeking to suggest they are all crooks - only to point out that expecting the Beeb to reference Labour MP connections to the Coop should lead to reference to similar connections of other MPs to other organisations implicated in various aspects of the crisis.

  • rate this

    Comment number 203.

    109. Little_Old_Me

    Why the collective focus on Coop?
    I imagine because it was never an Investment bank, took over a mutual, is a mutual & in the past week a report says that the crash was nowt to do with the casino banking & every bank basher on here has cited it as an example for the rest, then it turns out it to be the same, only smaller. So bad management & Hubris, no more boom & bust?

  • rate this

    Comment number 202.

    Is this the same Goldman Sachs that at the height of the crisis 21/09/08 applied to the Fed, along with Morgan Stanley, to become a bank bringing it inside the Feds safety net. The same GS that was borrowing from the PDCF (Primary Dealer Credit Facility) & who Bernanke later told the FCIC "We thought there was a real chance they would go under".
    Is this what passes for high quality in their world.

  • rate this

    Comment number 201.

    Post 200 and 197. New Labour were hardly enemies of Goldman Sachs. They employed plenty of ex Goldman bankers.

    Gavyn Davies being merely the closest friend Gordon Brown had at Goldman's and the BBC.

  • rate this

    Comment number 200.

    Thanks for clarifying alb1on. Again, you may be right to question their independence, but looked at another way GS was for years regarded as the highest quality investment bank in the world that only employed the best. So it shouldn't be a big surprise that some of its former employees progress to influential positions.

    Of course, some will always think they are all crooks - which some might be.

  • rate this

    Comment number 199.

    Don't worry everybody we've got John Griffith-Jones to look into it.

  • rate this

    Comment number 198.

    195 you mean like those nice banks in Russia?


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