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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 48.

    The gravy train at the coop bank top 4 executive committee members
    2012 2011
    Rod Bulmer £455K £353K + 29%
    Keith Alderson £361K £392K -8%
    Helen Taylor £236K £81K +190%
    James Mack £277K £122K +120%
    Further 6 executive committee members total wage bill 2.4 million. Total wage bill up 50% in one year. ETHICAL BANKING at its best.

  • rate this
    0

    Comment number 47.

    So the oridinary guy has to pick up the tab for the so called ovepaid "experts". Who were the banking experts at the Co-Op who bought Britannia that now turns out to be a crock of sh*t. Where are the accountants, that earned millions in fees from the takeover doing "due dilligance". How much easier to screw bond holders than hold the executives and accountants responsible for their actions.

  • rate this
    0

    Comment number 46.

    I notice immediate repayment of the Labour Party's £3.5 million delinquent loan is not mentioned

    As a Co-op member (and not a leftie) I will be demanding this be repayed with interest with immediate effect and suggest everyone do likewise

  • rate this
    0

    Comment number 45.

    35.stereotonic
    Time for a new way of thinking?!
    ~
    Rather, time for a new way of voting?

    But I guess we will get to a sunny May in 2 yrs time and many people will stay home and many others will vote the same way they voted in all previous elections for the same Party for the same reasons ...

  • rate this
    0

    Comment number 44.

    27.Reality Check
    Where have all the true Banking skills gone?
    ~
    Hard to believe but they have probably been over-regulated out of existence. Certainly the old Institute of Bankers exams covered all the things that would help a prudent banker avoid or least be aware of all that has happened over the last twenty-five years.

    They no longer exist in that form ...

  • rate this
    +4

    Comment number 43.

    @ 42. stereotonic
    "Where has all the money gone?"

    Overvalued housing and over leveraged people and businesses.
    Only after we devalue our housing stock and deleveraged can we get back to a more stable economy.
    Unfortunately this will not be Quick, easy or pretty!

  • rate this
    0

    Comment number 42.

    If all the banks are falling apart, whilst robbing everyone blind and being bailed out by the ever struggling public . . . . Where has all the money gone? Should this not be investigated?
    Same as all these massive fines put on the big guns. The gvt say they get some of the 'tax payers' cash back, but it never comes back to us does it?
    The corrupt gvt and the banks will be the death of this country

  • rate this
    +1

    Comment number 41.

    I haven't seen anything to suggest that Co-op (either Bank or Group) management have indicated that permission to sell part of the business will be sought from the business' owners. If they aren't going to do this then that must surely be a huge betrayal of the co-operative principle, and would surely lead to an exodus of those who use the business because of those principles.

  • rate this
    0

    Comment number 40.

    "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 means the rest of the Co-Op group is being put on the table as security to prop up the bank.
    I would suspect this has been done reluctantly by the Co-Op.
    You would not normally want to expose the rest of your business.

  • rate this
    0

    Comment number 39.

    Co-op, still the same old story, the Regulators were out of their depth, despite all the changes the people in command if not still with the FSA are working in positions of authority in the city. How could they allow the Co-op to buy 631 branches from Lloyds. Tens of thousand decent people lost their jobs as a result of the crash and still the regulator fails in his junction

  • rate this
    +2

    Comment number 38.

    I hope the Coop calls in the bad loan to the near bankrupt Labour Party who nearly bankrupted our country.
    This would be sweet revenge on the incompetents who got our country (again) in such a mess with spin and misinformation.

  • rate this
    -2

    Comment number 37.

    If the regulator is not incompetent, toothless and spineless, then are their strings( of our independent regulator) being pulled by the political puppet masters

  • rate this
    +2

    Comment number 36.

    @31 KC
    Another even more likely possibility is that Britannia (& Co-Op?) were lending on mortgage (maybe also unsec.loans for spending, too) to customers in areas 1. more disadvantaged by falls in income, and 2. in areas more disadvantged by house price falls or 3. more disadvantaged by the London Boom in housing that is now looking dangerously out of control.

  • rate this
    +2

    Comment number 35.

    Before long, everything will be owned and they will be able to charge whatever they like leaving most of us unable even to eat.

    Time for a new way of thinking?!

  • rate this
    +2

    Comment number 34.

    Do all roads lead to Britannia? Or is this a red herring.
    Their CEO got an obscene payoff.
    If the book brought over was "overvalued" should not he and his board be made to answer some difficult questions?

    Either way somebody had some overvalued/impaired/capital hungry assets on the book? Who was it Co-op or Britannia?

  • rate this
    +2

    Comment number 33.

    Co-op was doing fine until they appointed the last director who tried to turn them into a high street bank with disastrous consequences. Think he got a golden handshake when he should really be banned from working in this sector again.

  • rate this
    0

    Comment number 32.

    The Prudential Regulation Authority has done a splendid job, compared to it counter part across the Irish sea.

    Further details by searching in googles for Windle stops swindle'

    Cheers

    The Common Informer

  • rate this
    +1

    Comment number 31.

    @23 KC
    You forget other possibilities. That is, with certain MPs & sections of the media misrepresenting or exaggerating aspects of the financial crash, SOME borrowers at Britannia&Co-Op have behaved irresponsibly with their loans on the basis "It was irresponsible banskters that got us into this mess, so I'm going to play fast and loose as well!"

  • rate this
    -1

    Comment number 30.

    @22.Deputydave62

    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.
    ---

    Erm.. no, it doesn't.

  • rate this
    +1

    Comment number 29.

    Hey ho! Another week, another bank rescue.

    Posters all & MPs please note:
    It has happened again
    It is not a casino bank
    It does not have hoards of traders earning millions
    The problems occurred within a mutual.

 

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