Editorial: Has our bank watchdog learned nothing?

The problems which led to the Co-operative bank's downgrade - while shocking from a bank that was supposedly so different - are wearingly familiar

Share

Just a few weeks ago, the Co-operative was still being tipped as the new force in banking. It was the squeaky-clean upstart, untainted by “casino” investment operations or the depredations of the boom; and it was routinely championed by politicians of all stripes as the standard bearer of efforts to crack open the unhealthy, too-big-to-fail dominance of the Big Five.

Now, though, the Co-op is in crisis. While there is no reason to believe that savings are at risk, so big is the hole in the bank’s finances that a credit-rating agency yesterday warned that it might be forced to seek a government bailout. And, for all that the ratings agencies lost some of their authority in the financial crisis, Moody’s decision to downgrade Co-op by fully six notches, to a junk status Ba3, is too damning an assessment to be ignored.

What happened? In fact, Co-op’s problems – while shocking from a bank that was supposedly so different – are wearyingly familiar. Put simply, it overextended itself and was caught out, with all the weak management, imprudent ambition and failure to keep an eye on the bottom line that that implies.

The result is a gaping chasm in the balance sheet. Not only might all the extra capital needed to meet beefed-up, post-crisis regulations not be found from the sales – of the life insurance business, for example – planned by the food-to-funerals parent group. Extra, significant losses might also be looming, as bad loans (on commercial property, in particular) go sour. Meanwhile, with interest rates at an all-time low and the economy sluggish, the prospects of profits growth to help fill the gap are vanishingly slim.

The company, not surprisingly, is trying to play the matter down. Yes, chief executive Barry Tootell resigned yesterday, but his departure was to be made public next week anyway, Co-op says; the date was merely brought forward. Meanwhile, the need for a bailout is vociferously denied. Nor are such protestations necessarily unjustified. Co-op does still have plenty of options for solving its problems and a number of potential sources of capital as yet untapped.

But even if the bank can weather its financial storms, the latest debacle can only raise serious questions for regulators. In fairness, the Moody’s bombshell did not drop completely out of the blue: there were reports as long ago as February that the now-defunct Financial Services Authority had identified a £1bn shortfall that Co‑op needed to address. A question less easily answered, though, is how so weak an institution was allowed to spend a year in talks about buying 630-odd branches from taxpayer-backed Lloyds before the deal finally collapsed last month.

Was it not the duty of the watchdog to consider Co-op’s financial position when negotiations first began – or has nothing been learned from the catastrophes of 2008? Indeed, is our regulatory regime no more adept at ensuring bank solvency and at crimping reckless overreach now than it was before the crisis struck? It is up to the FSA’s successor – the Bank of England’s newly created Prudential Regulation Authority – to answer such questions, and to do so swiftly.

But the implications of Co-op’s mess do not stop there. Few dispute the need for a shake-up of Britain’s closed and sclerotic retail banking sector. Yet a chunk of Co-op’s problems stem from its purchase of the Britannia Building Society in 2009, a key step along the path to becoming the “challenger” so lauded by Ed Miliband, George Osborne et al, and it was the same impetus behind the talks with Lloyds. The proposal is not, it turns out, without risks of its own.

Neither is Co-op the only one with funding issues. The Bank of England has warned of a need for up to £25bn in extra capital across the industry. Co-op’s teetering may, then, be just the beginning. After yesterday, it is certainly difficult to conclude that Britain’s banking industry has been fixed.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Business Analyst - 12 Month FTC - Entry Level

£23000 - £27000 per annum: Recruitment Genius: A Business Analyst is required ...

Recruitment Genius: Chefs - All Levels

£16000 - £23000 per annum: Recruitment Genius: To succeed, you will need to ha...

Recruitment Genius: Maintenance Engineer

£8 per hour: Recruitment Genius: This is an opportunity to join an award winni...

Recruitment Genius: Telesales Executive & Customer Service - Call Centre Jobs!

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Day In a Page

Read Next
George Osborne appearing on the BBC's Andrew Marr Show on Sunday, 5 July 2015  

George Osborne says benefits should be capped at £20,000 to meet average earnings – but working families take home £31,500

Ellie Mae O'Hagan
The BBC has agreed to fund the £650m annual cost of providing free television licences for the over-75s  

Osborne’s assault on the BBC is doing Murdoch’s dirty work

James Cusick James Cusick
Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

Tribal gathering

Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

Gaza, a year on from Operation Protective Edge

A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

Illnesses, car crashes and suicides

Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
Srebrenica 20 years after the genocide: Why the survivors need closure

Bosnia's genocide, 20 years on

No-one is admitting where the bodies are buried - literally and metaphorically
How Comic-Con can make or break a movie: From Batman vs Superman to Star Wars: Episode VII

Power of the geek Gods

Each year at Comic-Con in San Diego, Hollywood bosses nervously present blockbusters to the hallowed crowd. It can make or break a movie
What do strawberries and cream have to do with tennis?

Perfect match

What do strawberries and cream have to do with tennis?
10 best trays

Get carried away with 10 best trays

Serve with ceremony on a tray chic carrier
Wimbledon 2015: Team Murray firing on all cylinders for SW19 title assault

Team Murray firing on all cylinders for title assault

Coaches Amélie Mauresmo and Jonas Bjorkman aiming to make Scot Wimbledon champion again
Wimbledon 2015: Nick Bollettieri - Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!

Nick Bollettieri's Wimbledon Files

Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!
Ashes 2015: Angus Fraser's top 10 moments from previous series'

Angus Fraser's top 10 Ashes moments

He played in five series against Australia and covered more as a newspaper correspondent. From Waugh to Warne and Hick to Headley, here are his highlights
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high