Co-op Group has to find £1.5bn to fund its bank
The Co-operative Group considered admitting its struggling bank into a Bank of England rescue procedure, the BBC’s Robert Peston has learned.
Earlier this year the the group was ordered to raise £1.5bn of capital in order to close a gap in Co-op Bank’s financial resilience.
At that stage the Co-op considered putting the bank into an official process called “resolution”.
But the group decided the move could do too much damage to the Co-op brand.
Instead, it came up with a compromise plan to raise £1bn of the capital – which banks are required to hold in order to protect savers and depositors from losses – and another £500m by forcing losses onto holders of the Co-op Bank’s debt.
While regulators have approved the rescue plan, putting it into place is proving a complicated and lengthy procedure.
Creditors and customers of Co-op Bank are part of a bold experiment, which – if it works – could set a useful precedent for how banks can be rescued without placing a burden on taxpayers.”
Owners of the bank’s debt and preference shares will be forced to take losses.
“Co-op Group’s management regarded heaping losses on the holders of subordinated debt and preference shares as fair, given that, if Co-op Bank were to go into resolution, these investors would almost certainly incur much bigger losses,” said our business editor.
If all goes to plan the refinancing should be completed by mid-November.
There is concern that if the process drags on, depositors might become nervous and start leaving the bank.
The problems at Co-op Bank stem from its purchase of the Britannia Building Society in 2009, which turned out to have large amounts of bad debt.
The situation was made worse when the regulator imposed more demanding requirements on all banks for the amount of capital they have to hold in reserve.