SIMON WATKINS: Co-op needs help...but not a bailout

By Simon Watkins

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Co-op logo

The Co-op Bank has demonstrated what many have always known – being backed by a mutual organisation does not make you immune from reckless over-expansion, poor risk judgement and the financial foolhardiness that we have come to expect from the City.

The downgrading of the bank’s debt to junk status last week by Moody’s sent the value of its bonds plunging and heaped humiliation on the bank.

It also raises questions over whether the Co-op Group should continue in the banking business at all.

But the Co-op Bank is not on the brink of some crisis that will require a state bailout.

That idea emerged because the Moody’s debt rating report said the  Co-op Bank may need ‘external support to maintain regulatory capital levels’.

Not to stay afloat, not to pay its bills, but to meet regulatory capital levels.

This is a problem. It is a humiliation. But regulatory capital levels – the safety buffers demanded by the authorities – are rightly much higher than they used to be,  and falling short of those levels is not the same as needing a bailout.

 

It certainly does not indicate a immediate shortage of liquid cash, of which the Co-op Bank has about 3 billion.

Secondly, what is meant by ‘external support’? Many have jumped to the conclusion that this means a state bailout. But it actually means no more than it says – support from somewhere outside the bank.

The Co-op Bank is owned by the Co-op Banking Group, which in turn is owned by Co-op Group, the supermarkets-to-funeral services mutual. So ‘external support’ might mean either of these or a third-party buyer.

Should the bank need more capital support than is already being raised, then these will be the first ports of call long before the Treasury.

If the bank’s mutually owned parent decides the future requirements for capital are too high, then it may decide that the bank has to be sold.

All of which is several steps away from a taxpayer bailout.

Let me be clear. The Moody’s report is a humiliation for the bank and the group.

It lays bare an over-ambitious growth strategy, most notably the acquisition of Britannia Building Society in 2009, which has turned out to be loaded with bad debts that are now saddling the Co-op Bank with huge losses.

It shows that Co-op bosses were foolishly over-optimistic about the prospects for the economy in the immediate wake of the banking crisis.

And it shows that being a mutually owned group and ‘ethical’ does not make you a better banker when it comes to judging risk.

Like other banks it has turned out that the Co-op Bank may have been run very badly.

But we should not assume that taxpayers need to write a cheque quite yet.


The comments below have not been moderated.

Steve, noted. A Shiraz induced mind-block.......

Click to rate     Rating   1

@SenorKarlos - Birmingham Midshires merged with Halifax / HBOS, not the co-op. Britannia merged with the Co-op but in reality it was a rescue acquisition as Britannia was in trouble. The FSA played a role, as did parliament. Questions should be asked.

Click to rate     Rating   11

Merger or acquisition of Birmingham Midshires is irrelevant; the point made is it has put the co-op in a precarious position. The articles thrust is that the state will not need to assist, so the reference to Northern Rock is pointless. What cannot be denied is the Co-op's push into other areas, such as law, and the moral (ethical) high ground they take. I 'bank' with a mutual and like the model, but the co-op started to think along a more corporate model, seeing opportunity everywhere, when maybe they should have concentrated on providing the services they do well, including banking, without over extending themselves! Calling recently bereaved families to 'offer help' with probate from a tenuous lead acquired from the co-op funeral directors BEFORE the funeral has taken place, is neither moral or ethical! Co-op, in all its forms, is a business like any other. Do not be fooled....

Click to rate     Rating   6

To be clear, the Coop didn't acquire the Britannia building Society, it merged with it - no money changed hands... Maybe the Coop should have been more diligent and prudent but they are no more guilty of over optimism than the government and chancellor have been when predicting growth in the economy... If the Coop needs a bailout it will be precisely because of irresponsible scare stories in the popular press. The Coop is NOT Northern Rock...

Click to rate     Rating   22

Thank you for this article. It would be interesting to find out exactly what was in the Britannia's woodshed however if its going to have an effect on the Co-op as a whole. What was the reason for the takeover, was it another Lloyds/HBoS style cobble up, were there vested interests etc etc, where were the "bad loans" etc.

Click to rate     Rating   18
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