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Beleaguered Co-op in fresh black hole challenge

  • @simonnread

New concerns about the capital shortfall that led to the collapse of the Co-op Bank’s bid for 632 Lloyds branches emerged today following the publication of a letter from Britain’s leading Bank regulator.

Andrew Bailey, deputy Governor, prudential regulation at the Bank of England, published evidence to back up his earlier assertion that the deterioration in the Co-op’s loan book – which led to a £1.5bn black hole – was largely due to portfolios inherited from the Britannia.

The letter was sent to Andrew Tyrie, chairman of the Treasury Select Committee, after Mr Bailey’s assertion had been questioned by former Co-op Bank and Britannia boss Neville Richardson, who told MPs that there was “no issue” with the mutual’s assets. He blamed the loan losses on the new regulatory requirements and the actions of his successors.

While Mr Bailey said his letter “is not intended as a criticism of Neville Richardson”, he provided details – including evidence of meetings – that suggest the assets inherited from the Britannia by the Co-op Bank were “a significant factor” in the Bank’s problems and capital shortfall.

“My concern was not just that the former Britannia assets had contributed a significant proportion of Co-op Bank’s loan losses but that the nature of those assets meant that they were likely to lead to further impairment,” Mr Bailey wrote.

In response Mr Tyrie, said: “The Committee has received apparently conflicting evidence. We will be taking more, in formal sessions and in writing, to get to the bottom of this.”

Meanwhile The Co-operative is facing increasing difficulty in its attempts to finalise plans that will see it inject £1bn to save the troubled bank. 

It is forcing Co-op Bank bondholders to provide £500m to save the Bank through their holdings being converted into new shares.

But two US hedge funds – which have built up large holdings in the bonds – have forced the b bank to set up an independent committee to review the American investors’ plan to turn the 140-year-old mutual into a listed company.

Bank bondholders have also been angered by news that regulators gave up powers which could have been used to force the group to inject more cash into its banking operation.