IT SHOULD have been no surprise to hear this weekend that a hit on junior bondholders is among the options the Co-operative Bank is considering to fill its newly-uncovered, gaping capital hole. Barclays was warning this could be the case back in mid-May.
What remains shocking is the speed of the Co-operative Bank’s reputational descent. This financial tangle was, until April, picked out as the mutual darling that, in buying 632 Lloyds branches, the so-called Project Verde deal, would create a new challenger brand on the high street, able to inject some much-needed competition across the UK.
It has not proven so simple. Everyone involved must be ruing that the bid from Lord Levene’s NBNK was not taken more seriously.
There was always a significant risk that scaling up the Co-op Bank so fast would prove untenable – had the deal gone through, it would have increased the Co-op’s branches from 300-odd to nearer 1,000 and more than doubled its market share to around seven per cent of UK current accounts. It couldn’t have coped. As I wrote on these pages in July last year: “The flipside of creating more competition is expecting a smaller player to punch above its weight almost overnight.”
As it turned out, it is as well for all concerned that the deal never completed. That the Co-op Bank had a capital hole shows it was far from ready for primetime.
To believe otherwise was in any case to misunderstand how uncompetitive markets correct. Disruption occurs, as professor Clayton Christensen has shown, not by regulators creating some full-grown Frankenstein’s monster of a competitor from odd parts but at the edges. Under-served, low-margin business gets taken over by hungrier, more adaptable players that then incrementally undermine the business case of established giants.
We need to start thinking this way to improve the financial sector: it means fewer mad scientist schemes involving sewing together questionable raw materials and greater concentration on allowing the marginal players room to thrive. Why weigh them down with a culture of compliance that supports the present giant-sized incumbents?
It is also a mistake to believe that the mutual model offers some magical alternative to the listed, for-profit firm. The coalition has been supporting this wrong-headed view, with its talk of the John Lewis model for public services. Euan Sutherland, chief executive of the Co-operative Group, agrees, even in the midst of the Co-op Bank’s tribulations, telling his shareholders in May with a straight face that “traditional capitalist models are not providing the answers to people today.”
Yet traditional co-operative models are not playing out too well themselves. Mutual members must now grapple with what a bail-in process designed for conventionally-owned, publically-listed banks might mean if it proves necessary in their case. If sharper-elbowed bondholders turned shareholders are suddenly thrust among the Co-operative Bank’s friendly society, the outcome may not prove cordial.