The Plight of the Co-Operative Bank

Today’s post focuses on the news that the Co-operative Bank (the ‘Co-op’ bank) has had a £700 million rescue package approved by its members today. The bank, which has experienced a decline in its fortunes since the Financial Crisis, has presented this recent package as a viable method of stemming the bleeding that goes back to its merger with the Building Society, Britannia, in 2009. The obvious question is whether this latest attempt to halt the slide will be effective, or whether the associated 145-year history looks like it will be coming to an end in the not-too-distant future.

As stated above, the co-op bank can trace its roots back to the Co-operative Wholesale Society of Manchester, which was established in 1872. However, this British institution as experienced dire times of late, and that is commonly traced back to 2009 when the company merged with Britannia, a large Building Society; the deal was heralded as the ‘next step in the renaissance of the co-operative and mutual sector’. Although job losses were announced shortly after in 2011, the promoted health of the company looked good when the Co-op group announced that it was bidding for 632 branches from Lloyds Bank in August 2011, although that perceived buoyancy was dashed shortly afterwards when the regulator overseeing the attempted purchase warned Lloyds that the Co-op group did not have the funds to underwrite the proposed deal. After George Osborne, our old friend, had championed the deal as creating ‘a new challenger bank’, the group announced a massive £600 million loss the year later, which preceded the withdrawal from the bidding process for the branches of Lloyds. Since that time, the bank has suffered disaster after disaster, ranging from its chairman being filmed arranging to purchase illegal drugs, to the bank’s declaration that there was a £1.5 billion hole in its accounts which, for a bank this size, is usually terminal. Recent news confirms the deterioration of the ethically-minded bank, with reports (from the Competition and Markets Authority) suggesting that it was not clear enough when informing customers about overdraft charges – so, not very ethical on that front; this is likely just one of the many reasons why over 25,000 customers left the bank in the first half of this year alone. Yet, today’s news may be seen as a positive outcome from recent negotiations regarding the bank’s health, but in reality it may be anything but.

The deal with the bank’s creditors, which consists of a number of large investors like BlueMountain Capital, Silver Point Capital, and GoldenTree Asset Management, has been tentatively framed as a pathway to success by the bank, with the CEO claiming that the second half of 2018 and 2019 will represent periods of growth for the company. Whilst the deal, which will see investors swap their bond holdings for shares, may be being tentatively promoted, the bank itself suggests that more job losses may be imminent; also, whether the deal will be enough is another matter entirely.

Ultimately, there is a debate regarding whether the privatised bail-out represents a desperate attempt to survive, the right course of action, or more broadly whether it suggests that the proposed reduction of the too-big-to-fail safety net is working i.e. banks will look to private resources for assistance. One commentator suggests that the broader effects of this deal on the discussion regarding the regulatory approach to bail-outs should not be overstated, and that is correct – the co-op bank is not your usual bank; despite the introduction of hedge-funds and the like into the equation, the bank is still an institution driven by core principals which, theoretically (and, in all honesty, practically) make their client base ‘stickier’ than other institutions’ client bases. There is a potential that the £700 million finance package may help the co-op banks situation, but at the moment the bank is particularly at the mercy of its environment, and the current environment is extremely volatile. Whilst it is hoped that the bank remains because, as banking cultures go, it is important that ethical banking exists, the exposure to the elements is a real concern. With the U.K. still to formally leave the European Union, and the erratic situation in the United States, the co-op bank needs some unexpected ‘wins’ and soon if it is to last another 145 years – in 2017, these ‘wins’ are apparently few and far between.

Keywords – Co-operative bank, banking, bail-outs, too-big-to-fail, United Kingdom, Ethics, Corporate Culture, @finregmatters