COOP Bank

There is now a great fashion for mutuals at the moment. They are even credited with holding part of the answer to the modernisation of Local Government. This interesting article about the plight of the COOP Bank reminds us however that structures are no guarantee of good behaviour and effective outcomes. Notwithstanding its mutual status the COOP bank’s problems seem to stem from the same sort of behaviour which brought down RBS. A shame as I still have a lot of time for the COOP as a concept even if its bank has now had to give up its mutual status as this story tells us:

The Co-operative Bank is to have its shares listed on the stock market for first time as part of a deal to plug a £1.5bn capital shortfall and stave off nationalisation following its troubled merger with Britannia Building Society four years ago.

As a result of an agreement hammered out with the Prudential Regulation Authority, the bank’s bondholders – including some 7,000 private investors – will be asked to take losses in return for shares in a move that raised concerns about the future of the co-operative movement and the bank’s ethical ethos.

Although the bank was already a public limited company owned by the Co-operative Group, the country’s biggest mutual which owns grocers, funeral homes and pharmacy chains, it will end up with shares listed on the stock exchange under a complex “bail in” of bondholders in October.

The “bail in” is a new, largely untested method for helping banks raise capital and allow the Co-op to avoid having to raid other parts of its business. Provided bondholders accept, it also allows the bank to avoid turning to taxpayers to plug the shortfall.

The bank, which has 4.7 million customers but has stopped lending to businesses, had run low on capital after incurring losses on commercial property loans largely granted by Britannia before the 2009 merger between the two organisations. Some £14.5bn of loans, largely granted by Britannia, have been put into a non-core bad bank to be sold off or run down.