Co-op capital hole was wake up call to City’s watchdogs

Tim Wallace
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THE CO-OPERATIVE Bank almost collapsed this month, with its parent group barely able to save the troubled lender according to a report published yesterday from ratings agency Standard and Poor’s.

If it had not been saved, analysts warn it could have caused financial chaos as new rules to allow a failure to happen smoothly are not yet in place.

The bank was revealed to have a £1.5bn capital hole earlier this month, requiring a £1bn recapitalisation from the group and a £500m contribution from junior bondholders.

“The collapse of a bank has been avoided in this case, but perhaps only by a small margin, in our opinion,” said the agency.

“Co-op Group has understandably pulled out the stops to support its bank subsidiary; however, we think that it would have had little further capacity to support the bank from a solvency perspective.”

The bank declined to comment. However sources close to the lender note it is only selling its insurance arms to finance part of the recapitalisation, and still has a range of other units aside from those which it could have turned to if necessary.

Standard and Poor’s argues the near-failure also shines a light on the progress made towards allowing banks to fail in a safe way – a key aim of new Bank of England’s prudential regulation authority.

Winding down the bank “could still have represented something of a gamble on the part of the authorities,” the analysts said.

“It is possible that the potential contagion effect of problems at Co-op Bank would have been higher in 2008-2009. In our view, the smaller, domestically-active moderately systemic institutions may in time become sufficiently resolvable, and the environment sufficiently conducive, that the authorities could allow them to fail.”

European plans on resolving failed banks are expected to be finalised in October and implemented in the coming years, giving more certainty on how lenders can be wound up in future.