Co-op Bank to fill £1.5bn hole

 

The Co-operative Group has reached agreement with the City regulator that the hole in the Co-op Bank is around £1.5bn, I have learned.

This shortfall in capital, the funds all banks have to hold as a protection against losses, is near the upper end of expectations. An announcement is expected early Monday.

The Co-op will raise much of the needed capital by what is known as a "bail in", converting loans to the group into shares which will be listed on the London Stock Exchange.

This contrasts with the many bank "bail outs" of 2007-8, in which desperate banks were kept alive by injections of funds from the public sector.

With a minority of Co-op Bank's future shares tradeable on the Exchange, the Co-op Bank will begin to look more like a conventional bank and less like a mutual - although it will still be controlled by the mutual Co-op Group.

This forced conversion of bonds into equity is likely to be hailed by the regulator, the Prudential Regulation Authority, as an important precedent - because it will demonstrate that banks in serious difficulties can be rescued without recourse to money from taxpayers.

For the past few weeks, the Co-op has been in tense negotiations with the PRA over the future of its bank, after it belatedly recognised that it faced huge losses on commercial property loans and its debt was downgraded to junk by the ratings agency Moody's.

Many of Co-op Bank's loss-making loans were acquired when it merged with the struggling Britannia Building Society in 2009.

Although depositors in the Co-op will be relieved that their bank is being rescued, the nature of the rescue will be highly controversial - because it may well be seen as the Co-op Bank moving away from being a pure mutual.

As I have already mentioned, some of its bonds, or loans to the bank, will be converted into shares, which will be listed on the London Stock Exchange - although the precise terms and scale of this debt-for-equity swap will be subject to negotiations between the bank and the investors which own the bonds.

The Co-op Group is expected to remain the majority and controlling shareholder in Co-op Bank, but a significant minority will be held by commercial investors.

What is unclear at the time of writing is whether the debt-for-equity swap will apply only to holders of subordinated debt, which is the debt perceived as riskier (in the jargon it is known as Tier 2 capital). There is £1.1bn of this subordinated debt.

However, it is possible that some holders of so-called senior debt will also be asked to convert a portion of their loans into shares.

That would represent a much more radical solution.

If that were to happen, British banks in general might find it more expensive to borrow by issuing senior debt.

Debt called "senior" is supposed to be less risky than subordinated debt, because in theory it is the last category of debt to be hit by losses when a bank or other borrower gets into difficulties.

As disclosed earlier this year, the Co-op Bank is also raising capital by selling its insurance operations and shrinking so-called non-core operations.

The performance of the City regulator will be seen as mixed in the Co-op case.

On the one hand, it may have succeeded in propping up the bank at zero cost to the public sector, which would be seen as a good thing.

But it has also been widely criticised for failing to see how weak the Co-op Bank had become till earlier this year.

Today, regulators concede that the Co-op Bank's previous management had done a poor job assessing and managing the risks of acquiring the Britannia Building Society.

But the PRA and the Treasury did not stop that same Co-op management trying to take on an even bigger challenge when it spent years negotiating to treble the size of the bank by buying 631 branches from Lloyds.

It abandoned the takeover of Lloyds branches in late April, and Co-op recruited a new chairman and chief executive of the bank in the past few weeks.

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

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  • rate this
    +1

    Comment number 28.

    Get the EXCEL spreadsheet out and just change the columns from red to blue. We are in trouble in this nation. God help us all

  • rate this
    +1

    Comment number 27.

    Where have all the true Banking skills gone? The Co-op Bank couldn't even assess the dangers and risks of taking over Britannia! Basic due diligence was lacking. but it appears also ignorance and incompetence was at work. Not all can be blamed on the Britannia takeover. The Co-op Bank has demonstrated no true Banking competence and true risk management since in any event. Shambolic again!

  • rate this
    +2

    Comment number 26.

    Alchemy is dead.

    Perpetual motion is impossible.

    There are no free lunches.

    These simple truths must be tattooed on the forehead of all senior bankers and politicians.

  • rate this
    +1

    Comment number 25.

    "Bail in".

    Hm, I wonder how many misleading metaphors the financial industry can use or come up with in the space of one financial debacle? . . .

  • rate this
    +2

    Comment number 24.

    Back when Verde was still on, the FSA had a few requirements for the co-op I recall. One was that the whole group would need a banker as boss.

    Imagine...

  • rate this
    0

    Comment number 23.

    "Many of Co-op Bank's loss-making loans were acquired when it merged with the struggling Britannia Building Society in 2009."

    This is an illustration of how much lying is going on about the solvency of banks. Either the Co-Op were negligent in their assessment of the Britannia or Britannia are guilty of fraud.
    So what about the state of other banks?
    Are we going to find out through disclosure?

  • rate this
    +2

    Comment number 22.

    In other words, the Co-op Bank is not taking in any more money. It is simply converting some of the money it already has from debt to equity - which technically swtiches it from a liability to an asset. This is enough to 'fill the black hole'. It sounds like the Co-op had the money it needed, just in the wrong form.

  • rate this
    0

    Comment number 21.

    Effects of Raising Interest Rates
    Increase in mortgage interest payments will lead to lower spending in the economy. Increases the cost of borrowing so people will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall. Government debt interest payments increase.Interest rates have an effect on consumer and business confidence.

  • rate this
    +2

    Comment number 20.

    Singapore's central bank has censured 20 banks for attempting to rig benchmark interest rates. UBS, Royal Bank of Scotland and ING have been told to set aside funds of over £500m/ $800m each
    Another 16 banks have also been ordered to set aside lesser amounts, including Barclays, Deutsche Bank, JP Morgan and HSBC as statutory reserves at the MAS

    Some familiar names there using the same tactics

  • rate this
    +2

    Comment number 19.

    Haven't we been here before?
    So, here we go again. Let's take a look at how the 'don't need laws, just guidelines, rules and regulations' have made no impression. Lame ducks buying out other lame ducks isn't working so, will they have to revert to the good old underhand tactics of interest rate rigging, bribery, fraud, corruption, drug cartel money laundering etc...
    Looks like it.

  • rate this
    0

    Comment number 18.

    Is this required to survive or is it part of another bid to secure Lloyds branches?

  • rate this
    0

    Comment number 17.

    "Cyprus is not the template"

    ...and I'm a monkey's uncle!

    Anyone...anyone with deposits over £85K in any bank, worldwide, now knows what to expect. Its not if, only when...

  • rate this
    -1

    Comment number 16.

    Oh I thought only " greedy City investment banksters" could ruin banks.
    Now you see it, most of our troubles have been caused by bog standard retail banks with feckless management. Having this "firewall" just reduces diversification, increases risk and makes it more likely the bank will go bust in a crisis.
    And regulators don't help. Don't rely on them when choosing where to save.

  • rate this
    +2

    Comment number 15.

    Will this deal reverse the Moody's downgrade? If not, it may not solve the underlying problem for the Co-op, since many current lenders/depositors require investment grade ratings

  • rate this
    +1

    Comment number 14.

    Look less like a mutual?

    Cane we be clear please. The Coop bank is NOT a mutual. Never has been.

    It is owned by one. Different thing.

  • rate this
    +5

    Comment number 13.

    Hard to believe we've had 5 years of stumbling from one problem to another & another. The incompetent men in grey suits have cost the country a King's ransom - depressed incomes, low savings rates, poor annuity values, taxpayer bailouts, low growth etc, etc.

    Surely there must be some banker/politician/economist somewhere who knows the right thing to do; or maybe they are afraid - very afraid.

  • rate this
    +1

    Comment number 12.

    The curse of Peston strikes again?

  • rate this
    +3

    Comment number 11.

    "Rue Britannia " anyone?

  • rate this
    +5

    Comment number 10.

    "and its debt was downgraded to junk by the ratings agency Moody's"

    The Co-op seem to be taking sensible steps to balance their books. So should they bother about a bunch of overpaid Americans, who couldn't see a crises even when it was rolling right over the top of them (think AAA rated sub-prime)?

  • rate this
    +1

    Comment number 9.

    So the Govt wants banks to lend more while at the same time keeping vast reserves aside for the next financial crisis (when or if the current one ever ends).

    Sounds like another Coalition cake and eat it, such as wanting people to work up to nearly 70 yet expecting there to be vacancies for the young to get into the job market. You cant have it all Cameron.

 

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