Stricken Co-op bondholders lay blame on FSA

A group Co-operative Bank bondholders have called on the regulator to re-think a capital raising plan forced on the beleaguered bank that will see their bonds converted into shares, saying former regulator the Financial Services Authority was aware of the bank’s situation before the crisis.

Mark Taber, leader of an action group of Co-op retail investors, said in an open letter to Prudential Regulation Authority chief executive officer Andrew Bailey that the FSA had approved the bank’s acquisition of Britannia Building Society in 2009 and should therefore have been aware of the latter’s lending activities.

These activities, Mr Taber continues, included securitisation of sub-prime mortgages, commercial real estate loans and other activities that presented risks which he claims have ultimately led to the bank requiring additional capital reserves.

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He has called for the PRA to review its £1.5bn capital requirement and the timetable it has given the bank, as well as the plan for raising that capital. He also calls for more transparency from the regulator regarding how it reached the £1.5bn figure initially.

Mr Taber writes: “The banking regulators... have admitted to the [Treasury Select Committee] that they were aware that the bank needed to raise capital and had a range of other issues to address including governance and management as far back as 2011, but made no public disclosure and seemingly did nothing to require the bank to take action.

“Furthermore, in your evidence to the TSC you said that you had conducted a stress test of the bank in 2012 which revealed deficiencies that the bank needed to address. This result was also not disclosed.”

He also argues that the steps being taken by the regulators imply that the bank is a systematically important financial institution, an assumption he contests.

“As a direct result of the PRA’s recent punitive and disproportionate actions we have moved away from a situation of the Co-op Group being prepared to do more to support its bank, bondholders being willing and expecting to contribute on a voluntary basis and the requirement of approximately £800m suggested by the audited accounts would have been filled.

“But the PRA’s position and inflexibility (it is treating the Bank as a Systemically Important Financial Institution) has caused everyone to dig their heels in, threatens to cause a standoff and risks an outcome nobody wants.”