Co-op saved, but banks face shake-up in pivotal week

The Co-operative Bank will this week announce a plan to fill a £1.5bn hole in its finances, just as the Parliamentary Commission on Banking Standards recommends new powers to break up struggling banks.

The Co-op's rescue, brokered with the Bank of England's Prudential Regulatory Authority, will come at no cost to the taxpayer, but see 5,000 small investors take a haircut on money they lent to the mutual.

The deal will be struck at the start of a pivotal week for the banking industry. George Osborne will fire the starting gun on the privatisation of Lloyds Banking Group at his Mansion House speech on Wednesday night. The Chancellor is also expected to say that a sale of shares in Royal Bank of Scotland, from which Stephen Hester was ejected as chief executive last week, will take longer.

A quick sale of Lloyds shares to institutional investors might be simpler than a "Tell Sid"-style offer to small shareholders, even though the Government is keen on widening share ownership.

Also this week, the commission's hotly anticipated report is expected to push for higher ethical standards in the industry which has been rocked by mis-selling and Libor rate-rigging scandals.

The all-party body, chaired by Andrew Tyrie and including the former Chancellor Lord Lawson, is expected to say that bankers should have their bonuses deferred for up to a decade in an attempt to foster long-term thinking, and face bans from the City if they are negligent. To make the industry more competitive, there will be moves to make it easier to switch bank accounts.

Some commission members also want to look again at splitting RBS into a good and bad bank that could better aid the recovery in the British economy.

Separately, the Bank of England will give further details of banks' balance sheet shortfalls, after saying in March they needed to raise a further £25bn to guard against further losses.

The Co-op traces its problems to commercial property loans acquired as part of the 2009 Britannia building society takeover. Its general insurance arm is already up for sale and loan books could also be offloaded as part of its rescue.