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Bailey: Britannia assets ‘significantly’ hit Co-Op

The nature of the former Britannia assets on the Co-Operative Bank’s loan means they are likely to lead to further impairment and they are significantly affecting the lender’s capital requirements, MP says.

In written evidence to Andrew Tyrie, chairman of the TSC, Andrew Bailey, the deputy governor of the Bank of England for prudential regulation, told the Treasury Select Committee, said that his concern was not just that the former Britannia assets has contributed a “significant proportion” of Co-Op’s loan losses “but that the nature of those assets meant that they were likely to lead to further impairment”.

The former Britannia assets, which fell onto Co-Op’s balance sheet when it merged with Britannia Building Society in 2009, were those on the bank’s balance sheet that were most vulnerable to further stress, Mr Bailey added.

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His letter to Mr Tyrie follows on from former Co-Op chief executive Neville Richardson stating that he believed the acquisition of Britannia in 2009 by the Co-Op had no effect on the bank’s £1.5bn capital shortfall in evidence to the TSC earlier this month.

Mr Richardson told MPs that less than £300m of the Co-Op’s shortfall was due to bad loans from the Britannia portfolio, adding that the Financial Services Authority would not have allowed the merger unless both organisations had sufficient capital adequacy.

However, Mr Bailey’s letter to Mr Tyrie offers a conflicting view. His letter states that more than 75 per cent of 2012 non-core loan loss impairments and around 85 to 90 per cent of the first half of 2013 non-core loan loss impairments related to Britannia-originated assets.

This corresponds to more than half of the bank’s total loan losses during the last 18 months.

Notwithstanding the level of losses incurred to date, the risk profile of the remaining Britannia assets were, and remain, a key factor in their assessment of Co-Op Bank’s current capital position, Mr Bailey said.

He said just under a third of the bank’s mortgage book consists of the Britannia’s former specialist lending portfolio, which also includes mortgage books it acquired, adding this contains significant levels of non-conforming or self-certification business that presents higher risk characteristics than Co-Op’s or Britannia’s ‘prime’ business.

Mr Bailey said: “Whilst Neville Richardson correctly noted some improvements of late, the risk-profile of the book still means it is subject to higher capital requirements and that it is not capable of easily being refinanced in the current market.

“Whilst recent performance has most probably been assisted by the continuation of the low interest-rate environment, the book remains vulnerable to payment-shock or other forms of stress, where the high LTVs could lead to significant losses in the event of default.”

Mr Tyrie added: “The committee has received apparently conflicting evidence. We will be taking more, both in formal sessions and in writing, to get to the bottom of this.”