Fresh row engulfs the Co-op bank

THE CO-OPERATIVE Banking Group was warned that it had insufficient capital to purchase hundreds of Lloyds branches as far back as late 2011, the City’s top regulator claimed yesterday.

Andrew Bailey, who is now the chief executive officer of the Prudential Regulation Authority (PRA), said that the Co-op had been told to raise more capital to progress with the deal.

He also insisted that the Financial Services Authority (FSA), which was replaced by the PRA, had never approved the Co-op bank’s bid for the branches. The sale failed in April.

The mutual-owned group shocked markets last month when it agreed to a bail-in rescue to plug its £1.5bn capital hole. The deal will hit the bank’s bondholders hard, forcing them to swap their debt for new bonds and equity in the bank, losing £500m in the process.

Bailey made the claims while being questioned by the Treasury select committee, which oversees the programmes of the Bank of England.

“Towards the end of 2011, we made it clear to them, and I’ll use these words carefully, it was not clear to us that the Co-op Banking Group had the ability to transform itself successfully and sustainably into an organisation on a scale that would result from acquiring the asset,” he said.

Bailey also said that the FSA’s comments should have been passed on to Lloyds: “I made it clear to them at that point, this is the tail end of 2011, that they had to make that clear to Lloyds.”

In a similar hearing last month Sir Win Bischoff, chairman of Lloyds, told MPs that the bank had only started to have doubts about the Co-op in December 2012, a full year later. Yesterday Lloyds stood by its chairman’s version of events.

Andrew Tyrie, chairman of the panel of MPs, said the committee would look into “whether the regulator’s message got through, how it was conveyed and what, if any, action was taken as a result”. Tyrie added: “Mr Bailey also told us he has evidence to suggest his requests were complied with”, implying that Lloyds had been made aware in 2011 rather than 2012.

The Co-op bank, which is in the process of being listed on the stock market as part of the rescue package, declined to comment on whether Lloyds had been informed. Since 2011, the management team at both the bank and its parent group have changed significantly.

In the same hearing, Bank of England deputy governor Paul Tucker, who finishes his time at the Bank later this year, told the committee that a new rule for banks requiring them to limit their lending based on the amount of money they hold in capital, should be introduced without delay. The new rules would ensure that banks held three per cent of the amount they extended in credit.