Co-operative Bank – what went wrong?

Co-op bank
Not so long ago, it all looked so rosy for the Co-op Bank
"One can hope the prospect of a customer exodus in the face of any change might persuade them to keep the ethical stance"
  • | by Tom Cropper

In the offices of Portcullis House, the Treasury Select Committee is trying to answer a thorny question: what went wrong with the Co-operative Bank?

Earlier in the year the bank sheepishly announced that it was short of money – £1.5bn short, to be precise – which it needed to plug a gaping chasm in its capital reserves.

As an aside it mentioned it also needed £100m to cover some wayward selling of payment protection insurance.

The bank – for so long touted as the white knight of ethical, responsible banking - suddenly appeared to be neither.

Scroll back a few years. Back then, the Co-operative, with its ethical lending policy, seemed a refreshing alternative to the greedy, irresponsible and (increasingly) bankrupt monsters of the high street.

Now, though, the bank, which for so long had been content to play in its small, quirky corner of the market, began to get ambitious. It looked around, flexed its new-found muscles and did something which, in hindsight, seems staggeringly ill-advised.

It purchased the Britannia Building Society and set about plans to construct a new ‘super-mutual’ which could take on and smash the big high street names.

For a long time it appeared to be working and, as recently as 2011, the bank appeared to be on the up with plans to buy 631 branches of Lloyds TSB.

However, behind the scenes all was not well as it became clear that the Co-op had inherited ‘bad debt’ from the Britannia.

Indeed, it would later emerge that around 10% of the commercial loans now appeared to be in serious danger of default, prompting a fall from grace of epic proportions. A botched IT project blasted a further £150m into the ether, and in March the Co-op Bank announced a staggering loss of £647m.

Credit rating agency Moody’s chose that moment to stick the boot in by downgrading the bank’s debt to junk status – a body blow which left serious doubts about the bank’s ability to raise the funds required to dig itself out of the mess.

The scale of the task was enormous. The Co-operative needed to cobble together £1.5bn in order to plug a hole in its capital that regulators insisted was filled.

An initial deal which would see bondholders stump up the cash in return for a share in the bank when it floated - and give the Co-op a 70-75% stake – received little support.

That package has now been replaced with a new one which gives the Co-op a 30% holding with the rest being owned by – wait for it – hedge funds.

On the bright side the bank can now claim to have a realistic chance of survival, but the question swings round to: what happens next?

If you’re a Co-op customer is it time to jump ship? In other words, will your capital be safe? Under the Financial Services Compensation scheme any deposits or savings up to £85,000 are protected by the government.

However, if you bank with the Co-operative because you like the way it invests in only ‘nice’ businesses, you may want to keep a look out.

The Co-operative has been at pains to reassure customers that the bank will continue to invest ethically. But with only a 30% stake in the company they no longer have the final say.

The rest is owned by hedge funds for whom the word ethics has normally meant the place they drive through on their way to Surrey.

One can hope the prospect of a customer exodus in the face of any change might persuade the Co-op to keep the ethical stance.

Meanwhile, the name, blame and shame game has started in earnest. The Treasury Select Committee is currently grilling Co-operative and Britannia staff and the Co-operative has also started  its own independent enquiry.

There is plenty of blame to go around. Why was the merger agreed on what, in hindsight, were such shaky foundations? What of KPMG, whose due diligence into the merger should have set alarm bells ringing?

In short, though, it appears that nobody had heard the story of Icarus. The Co-operative was a small bank which attempted to expand too fast. It got excited and took a leap of faith – it just forgot to take a look first.