The Co-operative Bank’s governance structure up to the middle of 2013 was “entirely inadequate” for a bank of any size, the Treasury committee report on the bank’s abortive attempt to buy 632 branches from Lloyds Banking Group in 2013 has revealed.
Its 123-page report, Project Verde: Sixth Report of Session 2014-2015, followed the TSC’s inquiry into the planned sale of the Lloyds branches, which were set to be divested to the Co-op Bank under Project Verde.
The report stated: “It was shocking that it was set up to become a challenger bank.”
Over the second half of 2012, and duration of 2013, the Co-op bank’s financial position deteriorated significantly, the report stated. Following the inquiry by the committee in June 2013, the prudential regulation authority revealed a shortfall of £1.5bn in Co-op Bank’s capital position.
Attempts were made to paint the bank’s losses as the result of a shift in the regulatory goalposts, however the committee did not agree.
The report stated: “The PRA’s capital exercise applied to a number of banks, and only the Co-op was so badly affected.
“Co-op Bank’s impairment losses were primarily the result of its own and Britannia’s own poor-quality lending, which was uncovered once the FSA began its capital exercise in late 2012.”
Although the report criticised the Co-op Bank, it said: “The problems at the Co-op over the past few years are not an indictment of the mutual model. Other firms have come through the financial crisis well.”
| Timeline |
• August 2008: FSA becomes involved in merger discussions. • July 2009: Merger of Co-operative Bank and Britannia Building Society approved by FSA. • April 2011: Lloyds Banking Group begins process of divesting 632 branches. The Co-op Bank emerges as winning bidder • March 2013: Co-op Bank chief executive Barry Tootell describes balance sheet as “strong”. • April 2013: Co-op Bank pulls out of Project Verde, citing difficult economic climate. • May 2013: Co-op Bank downgraded by credit rating agency Moody’s. • June 2013: Co-op Bank confirms a capital shortfall of £1.5bn. • April 2014 Kelly report published. • Oct 2014 Treasure select committee publishes Project Verde report. |
The report also stated that future inquiries should consider whether the FSA could have, or should have, developed better supervisory tools earlier, and uncovered the impairments sooner.
Auditor firm KPMG was also criticised in the report. The committee said the black hole in the bank’s finances should have been discovered sooner.
Last year, the Co-op Bank had to be rescued after it was left with a £1.5bn capital shortfall, which many blamed on its 2009 merger with Britannia Building Society.
In March, the Co-op Bank announced a plan to raise capital of £400m, in addition to its existing £1.5bn recapitalisation plan, towards which the Group last year committed to contribute £333m of capital.
Adviser View
Sebastian van Mook, financial adviser at Shropshire-based Abacus Associates, said: “Who is ultimately responsible? There seems to not be much accountability. If you look at some of the banking failures during the crisis, it seems politicians did a dirty deal handshake and no due diligence was done at all.
“There seems to be a domino effect with Project Verde. There were some prospective buyers, and the Co-op gets the nod – who makes these decisions? Again, no due diligence done. There seems to be dubious dealing every time.”
