Co-op Bank running out of options

Co-Op Bank Branch Image copyright Getty Images

After a near death experience in 2013 when Co-op Bank nearly went bust, it has been limping along ever since.

It was kept alive back then when lenders wrote off their debts in return for a stake in the bank, in a so-called debt for equity swap, but it has been unable to earn itself back to health.

It had been operating without the recommended shock absorbing capital for some time, the Bank of England told the BBC last week. This morning, the Bank welcomed Co-op bank's announcement.

When a bank has too little capital it only has three realistic options.

The first is to earn your way out of trouble. Retain any earnings you make to bolster the rainy-day kitty. In this super-low interest rate environment we have seen since 2008, all banks have found it very difficult to make a margin between what they pay their borrowers and charge their lenders.

In fact, this year the Co-op is expected to make a loss - after any earnings have been more than offset by the costs of sorting out old problems.

The second is to get your owners to put in extra money. Those owners include the Co-op Group who own 20%, a group of former lenders, plus a few hedge funds.

Although Co-op Group has not ruled out putting in extra money, it's a questionable use of funds for all of them, given that the bank is finding it hard to make a return for that investment for the reasons mentioned in option one.

The third is to find someone else well placed to add four million customers to an existing business - one which is not so bedevilled by legacy issues and might be able to find some economies of scale.

This list is not a long one but one name does suggest itself. The TSB, which was carved out of Lloyds to satisfy competition concerns over the scale of the Lloyds/HBOS merger.

With 600 branches, it lacks the scale to compete against the Big Five and it has a very strong capital position with no legacy issues.

Whether the bank would want to take on the problems of Co-op is questionable but it terms of brand (both have a local and ethical flavour to them) it might work.

The TSB is currently focused on completing a complicated IT separation from Lloyds, but the BBC understands that at the right price it might consider it,

Determining the right price will be hard as the amount of capital any buyer needs to sink into the Co-op is very far from clear.