Damning report into Co-op Bank practices released

Since the Co-op Bank revealed a significant capital shortfall last June, it's been up to Sir Christopher Kelly to look into failures at the organisation.

 

He began his work last August, and has come back to say that the Bank has suffered from "a flawed culture" and "fundamental weaknesses in the governance and management of risk".

 

The Bank's merger with building society Britannia took much of the blame for later troubles at the Co-op, as Kelly highlights a lack of due-diligence around the merger.

 

It's clear that at some point three members of the Co-operative Bank team, including the head of banking risk, Kevin Blake, spent a two day period reviewing 30 of Britannia's largest commercial loans in early January 2009 (there was possibly a fourth individual, perhaps from KPMG, according to interviewees).

 

"In the time it cannot have looked at them in any great detail", says Kelly, who notes that it was "puzzling that no written report was requested or produced". That is despite one member of that team describing the Britannia's portfolio as containing "the worst lending I have ever seen".

 

That merger was approved in April 2009.

 

Few of the Co-op's problems arose directly as a result of its co-operative structure. Although when the Bank was required to raise capital to meet regulatory requirements, the bank's ownership by a mutual "meant that it could not access the equity markets".

 

And while the Britannia merger has been responsible for much of the Co-op Bank's present difficulties, Kelly finds that "a narrow view of causality based solely on the performance of Britannia loans written pre-merger …  ignores the train of events and management action (and inaction) which can trace its roots to the merger." Other criticisms laid at the Bank's door include its inability to hire "an experienced, permanent banking group CEO following the resignation of Neville Richardson in July 2011."

 

Cultural flaws at the Bank group were also said to include "a willingness to accept poor performance", "a tendency not to welcome challenge", "a tendency to promote good news and to delay bad news", "unwarranted optimism that an economic recovery would raise low levels of profitability", and "less than complete transparency".

 

It was noted that a lot of top staff from Britannia also left in 2011, further weakening the Co-op Bank's management.

 

Kelly's report has cost the group and the bank about £4.4m. Speaking to Radio 4's Today programme, Kelly said that he hoped the "report will help both the group and the bank", after a "very sad story which goes back to the merger".