The Treasury Committee has ordered further investigation into previous regulator the Financial Services Authority to see whether it could have uncovered Co-op’s problems a lot earlier by developing better supervisory tools earlier.
In a Project Verde report published today (23 October) by the Treasury select committee, it is revealed that the Prudential Regulation Authority, which is the FSA’s successor as prudential regulator, admitted that with better supervisory tools, Co-op Bank’s problems would have been uncovered by the FSA sooner.
The report added that it was thanks to the development of these tools that the Co-op Bank’s impairment losses were eventually uncovered.
That is why the committee has told the independent inquiry into the going-ons at the Co-op Bank to consider whether the FSA should or could have developed better supervisory tools earlier, and thereby uncovered Co-op Bank’s issues sooner.
The inquiry should also consider whether Co-op Bank’s impairment profile “which appears to have differed from that of other banks throughout the financial crisis” should have led the regulator to inspect it more closely prior to 2012, the report said.
The Project Verde deal concerns the Co-op Bank’s attempted takeover of 632 Lloyds Banking Group branches in 2011. The deal collapsed in April 2013 after Co-op Bank revealed a £1.5bn capital deficit.
If the bank had monitored its loan book and its treatment of customers sooner as well as accounting for its banking IT programme in a different way the frailty of the lender could have been uncovered sooner, the report said.
Had Co-op Bank’s resulting capital shortfall been uncovered earlier, it is likely that the bank would not have progressed so far with Verde. As it was, “the rapid and late emergence of the capital problem led to Co-op’s withdrawal from the Verde process at a relatively late stage”.
The committee recommends the independent inquiry into the Co-op Bank events also looks at the role of auditor KPMG and again the FSA in relation to the late emergence of loan impairment and IT losses.
On the basis of these findings, the independent inquiry into the events at Co-op Bank should also form a view on whether Co-op’s Verde bid could or should have been halted sooner.
The report flagged up that the fall-out of Project Verde was that Lloyds was forced to resort to its fallback option of an initial public offering.
The result of this was new bank TSB, which consists solely of the business divested by Lloyds.
TSB has a personal current account market share of 4.2 per cent.
The MPs’ report warned there “is a risk” that a bank of this size may struggle to significantly grow and, as a consequence and may not be able to act as a “true challenger” in the market.
The report said this is not a judgement on TSB or its management but “reflects an observation of the Independent Commission on Banking that the entity resulting from Verde should have a market share of at least 6 per cent to have the best chance of becoming an effective challenger bank”.
Andrew Tyrie, chairman of the Committee said: “The Verde divestment should have been an opportunity to establish a significant new challenger in the UK retail banking market.
“But the opportunity was scuppered by the discovery, at an advanced stage in the process, of Co-op Bank’s capital shortfall by the bank, KPMG and the regulator.
“It is not uncommon for deals to collapse. But in this case it was caused by the near collapse of Co-op Bank itself. Each of the backstops—Co-op Bank itself, KPMG as its auditor, and the FSA as its regulator—failed to uncover the bank’s capital shortfall until it was too late.
“Each had a hand in this sorry tale. But by far the biggest responsibility lies with the Co-op Bank leadership.”
donia.o’loughlin@ft.com
