That basic lesson – that we must not allow systemically important institutions to be too big to fail – has created such a culture of caution, that even a relatively systemically unimportant bank such as the Co-op, is continuing to occupy more time than is really appropriate.
The hearing by the Treasury select committee into Project Verde is a painful, humiliating example of regulatory failure and executive incompetence.
Never before have the captains of industry been held to account in such a way, and never before has their ignorance been exposed in such a naked fashion.
In his evidence, Barry Tootell, the former head of the troubled bank, who left in May after a write down by Moody’s, the ratings agency, tried his best to convince the committee that there were no financial black holes when they attempted to buy the 600 odd Lloyd’s TSB branches. He failed.
As the committee’s chairman Andrew Tyrie told him, the bank’s capitalisation was such that even a ‘puff’ of wind could have blown it over.
Mr Tootell told the MPs that the bank’s core tier-one capital of 9.2 per cent was sound and that what pushed it over the edge were the possible liabilities for alleged mis-selling of payment protection insurance, and the poor quality of mortgage loans taken on board with the take-over of Britannia Building Society.
Two things about this, particularly after the Northern Rock debacle: did the Co-op carry out due diligence, if so how did this financial black hole get under the radar? And, with an alert City regulator, especially so after the roasting it got after the poor supervision and regulation of Northern Rock, how did this one get away?
Did the Co-op carry out due diligence, if so how did this financial black hole get under the radar?Mr Tootell did admit that the bank’s capital position worsened in 2012, which they had planned to remedy by selling the insurance business.
He also suggested that the former Financial Services Authority, which even its successor body the FCA is fighting to distance itself from, gave full approval to the Britannia merger.
If that is correct, and there is no reason why it is not, then we the public want names: who were the individuals who carried out the due diligence, who signed on the dotted line.
The elephant in the room, however is the former chief executive of the disastrous FSA, Hector Sants, who was knighted for services to financial services.
The Britannia/Co-op Bank merger went through in July 2009, two years after Sir Hector took up his chief executive role and three years before he left. Should the buck stop with him?
In any case, surely, had this been reported to the FCA/PRA, then that should have put the breaks on the proposed purchase of the Lloyd’s Banking Group branches, at the very least, if not pull the plug all together. Again, the regulators took their eyes off the ball.
It is expected that the former chief executive of the Co-op Group, Peter Marks, will be invited by the committee again for further questioning and, no doubt, will attempt to fill in some of the missing informational holes.
Of course, there is a lot of background noise about ethical banking and the centrality of the Co-op Bank. It is nonsense. Look what ‘ethical’ approaches has done for the Co-op.
The argument for an ethical and diverse banking landscape has paled in the light of what is on offer, everything from Triodos Bank to the new TSB.
Even so, given the times we are in, is a hedge fund the appropriate owner of a retail bank, given their business models?
Any reasonable person will say there is a time and a place for the hedge fund business model in the wider financial landscape, but ownership of the Co-op Bank is not necessarily it.
The decision by the state-owned RBS bank to ring-fence its toxic assets is a model for the way that the Co-op Bank should be laid to rest.
Regulators should smoothly transfer account holders to a bank of their choice while ring-fencing the rogue accounts and set about recovering that money.
In the meantime, the FCA/PRA and FSCS must be vigilant that the Co-op Bank does not use its present troubles to circumvent resolving the many payment protection insurance claims it has on its books.
The bottom line to all this is that the Co-op Bank is not systemically important; it is not even essential to its account holders.
The reality is its importance is sentimental for a small minority of people who like the idea of their money being saved with a mutual.
The longer we have the TSC hearings, the more we prevaricate about the Co-op Bank’s medium-term future, the more urgent it should be that we put it quietly to rest.
Transfer the good accounts and active loans, ring-fence the rogue accounts, and put it out of its misery.
When all is said and done, the sooner we pull the plug on the Co-op Bank the better for the wider Co-op Group, for the banking industry and for financial services in general.
Hal Austin is editor of Financial Adviser
