New bail-in plan for Co-op bank

THE CO-OPERATIVE Group is this morning expected to outline plans agreed with regulators at the Bank of England to plug a huge capital shortfall at the mutual’s banking arm.

The bank hopes to reassure with a wide-ranging plan, to be implemented over the coming months. It is expected to reveal a capital hole of up to £1.5bn – below the £1.8bn some analysts had feared, but still too large to be filled by the bank’s previous plans.

The rescue deal between the Co-op bank and the Prudential Regulation Authority is expected to involve junior bondholders being offered a deal to swap debt for equity in a new instrument in the lender.

The remainder will come from selling its life and general insurance arms as well as running down bad loan books, mostly inherited from its merger with the Britannia Building Society.

The parent group has made clear it will support the bank, but it is likely that junior bondholders – often retail and pension investors – will lose out. The bonds are trading at a discount of up to 30 per cent, indicating markets’ expected losses on the debt instruments.

The Co-op, Britain’s biggest mutual funeral services and pharmacies, has until the end of June to agree a plan with the PRA to fill a capital shortfall at its bank.

It comes after the bank pulled out of the deal to buy 632 branches from Lloyds, followed by a six-notch down- grade from credit ratings agency Barry Tootell. He was replaced by Niall Booker, who is leading the negotiations.

In a column for The Times today, David Davis MP, formerly the chairman of the Future of Banking Commission, criticised George Osborne’s hands-on role in the failed Lloyds bid, saying the bid point “to the invisible hand” of the Treasury and “raised suspicions of ministerial interference”.

The chancellor is expected to use his Mansion House speech on Wednesday to confirm plans to return Lloyds to shareholders before the election in 2015.