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.