There’ll be more than jaws dropping at the Co-op Bank before too long

Outlook:

OUTLOOK: Co-op’s beleaguered bank is often held up as proof that things have changed in the world of financial services.

Here, it has been said by many eminent people, is an institution that was broken but has been put on its feet again without recourse to public funds. 

Unfortunately the good news story so many were pinning their hopes on needs to be put on hold because the Co-operative Bank is not co-operating. It’s back on the critical list. 

Another £400m has to be raised from investors to keep the show on the road after the new management found a JCB full of dirt that we didn’t previously know about. 

The problems range from simple lapses in record keeping, to the need for more funds to cover compensation for those mis-sold payment protection insurance or interest rate swaps, to “technical” breaches of the consumer credit act. Oops. 

The extra costs on issues like, which have been identified by the bank’s “liability management exercise”, are jaw dropping. So much so that jaws will be on the floor. Using such a bland corporate term for this appalling mess is akin to describing radiation as magic moonbeams. 

What should be keeping chief executive Niall Booker and his regulators awake at night is the question of what happens if the hedge funds who bailed the thing out last time decide not to throw good money after bad. It’s not as if the Co-operative Group is flush with cash it could throw into its bank’s hat, and who else in their right mind would invest in a ship that has a hole below the waterline that everyone thought (and were told) had been more or less plugged. 

There’s a similarly burning question for Co-op’s depositors, and that should be just as worrying for the men at the top: Why hang around and put your money at risk while they sort this one out. 

It’s true that the bank’s key stakeholders are a way from throwing in the towel. And even were that to happen, there is a compensation scheme covering nearly all deposits. 

But do its customers really want to rely on that when finding a new home for their money has never been easier thanks to the shiny new account switching service that the Payments Council is overseeing?

There are many Co-op depositors who may feel that the rational decision is to put it to the test. All the evidence suggests that switching accounts is now very much easier than it used to be. Co-op and its regulators need to be alive to the unintended consequences of that. 

Experience counts – and it costs money, too

 Co-op is far from the only problem facing the City’s watchdogs. It might not even be the biggest.

The National Audit Office yesterday issued a report on both the Prudential Regulation Authority and the Financial Conduct Authority, and the really worrying issue it flags up is the level of staff turnover. More than a third of the FCA’s staff have been with the watchdog for less than two years. A quarter of those walking out of the PRA’s offices at the Bank of England (its parent) are top performers. Just the sort of people, in other words, whom it really needs to keep. Ideally, a regulatory body should have people around who have experienced multiple crises so they know how best to react when the next one hits. But at this rate, the PRA and FCA are running the risk of not having good people in place who were around for the last one, let alone earlier ructions.

Inexperienced staff make mistakes. This is inevitable; in fact it is the only way they learn. The impact of these errors can be ameliorated if there are experienced people around to nip problems in the bud. It’s when those people aren’t around that things get dangerous.

In addition to demanding that they demonstrate value for money, the report blandly recommends that the watchdogs “review the effect” that the turnover rates are having and then tailor their offers to “reflect the target turnover rate”.

The reality, unpalatable as it may be, is that the regulator may simply have to pay more. Not so much at the senior levels. There is simply no way they can compete with the millions big banks can offer to entice regulators to join their overpaid corps of executives.

No, the real need for action is at middle levels, among those who do the day-to-day work of overseeing the biggest, and most risky, financial institutions.

The regulators are funded by the financial services industry and the NAO’s report notes that the latter is worth an estimated £234bn.

Given how its leaders are always banging on about the importance of paying up to retain “top talent”, they surely wouldn’t object to paying a little more for some of that talent to stay with their regulators … As they should know, sometimes getting value for money means paying a bit more.

The solution for ailing Albemarle? A pawn shop!

 The pawnbroker Albemarle & Bond has fallen on the hardest of times. Its shares are effectively worthless and it’s now running a very real risk of being thrown out of work. In the meantime it desperately needs credit, but the banks are saying no.

Does that sound at all familiar? Fear not, there is a solution. Albemarle is not without assets. It has a lot of shopfronts, and decent gold reserves, too. Perhaps, then, it should practise what it preaches by loading up a skip and taking the lot down to the nearest pawn shop.

It’ll probably find that the interest charges on any loan it is offered are quite high. But if the company comes through this crisis, it will at least gain an understanding of how its customers feel.

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