Andrew Bailey, chief executive of the PRA, told the TSC he had put senior management “on notice” about capital problems in 2011, when he was deputy head of the prudential business unit and director of UK banks and building societies at the former FSA.
In what MPs described as a “powerful” and “gripping” testimony, Mr Bailey suggested the board had taken a “looser approach” than other institutions to the issue.
Giving evidence to the committee’s inquiry into Project Verde, Mr Bailey said: “A number of people at senior levels in the Co-op are saying “now that we look at it, we realise there were problems” but there may have been attitude that you can outsource risk management to the regulators.
“There is the risk that senior management will say ‘you cannot really expect us to see the problem until you come along and tell us - I reject that proposition’.
Mr Bailey said he suspected that Barry Tootell, former chief executive of the Co-op bank, only realised “his misjudgements” on Britannia’s toxic assets in December 2012, three years after the two institutions merged.
Britannia’s impaired loan book was deemed by Mr Bailey have been the “root cause” of the Co-op’s downfall. He argued that the building society’s desire to expand into “racier markets” was driven by low margins on traditional lending business, exacerbated by a “febrile” financial climate in 2008 - 2009.
He agreed with MPs that Britannia would have failed were it not for the merger, but alternative remedies, such as nationalisation or liquidisation, would have potentially caused other small building societies to collapse.
He said: “I am not certain that we would take the same path again in the future...Britannia’s balance sheet was of a different order of magnitude to Dunfermline, which was liquidised around the same time.
“Had we done that with Britannia, we would have increased the burden on the Financial Services Compensation Scheme. That is relevant because about 25 per cent of earnings at building societies go to the FSCS to pay the legacy costs of Bradford, Dunfermline and so on.
“This course of action would put raised the levies payable by building societies and more would have been disappeared as a result.”