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Categorized | Banks

Regulator keeps close eye on Co-op Bank

Posted on December 20, 2013

The UK financial watchdog continues to draw up contingency plans for a potential collapse of the Co-operative Bank, even though the lender has completed a sweeping recapitalisation.

The deal, handing a 70 per cent equity stake in the bank to institutional bondholders including several US hedge funds, follows a catastrophic period for the bank. A series of group and bank directors has left and Paul Flowers, the bank’s former chairman, was filmed allegedly buying illegal drugs.

    The Co-op Bank on Friday finalised a £1.5bn debt exchange intended to strengthen its fragile capital position. The decision is an important step towards restoring normality at the bank after a turbulent six months triggered by the exposure in June of a £1.5bn capital hole.

    While the regulator is satisfied that the recapitalisation heads off any imminent threat to the bank’s stability, it remains cautious about its prospects, according to people familiar with the situation. They said there were several obstacles in the new year that could thwart its recovery

    These people said the Prudential Regulation Authority is continuing to work on back-up plans to ensure it is ready to put the bank into resolution if it were to encounter further difficulties next year.

    Crucially, the Co-op Group must sell its general insurance business to raise the £333m of cash it has pledged to inject into the bank by the end of 2014. If it were to fail to sell the insurance business, the Co-op Group would need to raise the money by other means.

    Meanwhile the Co-op Bank must implement a tough new business plan that involves radically shrinking its retail branch network and dramatically reducing its overinflated cost base.

    The bank – and its parent Co-op Group – are also subject to multiple reviews
    of what went wrong and of how their governance and controls should be improved.

    Announcing the completion of the recapitalisation on Friday, Niall Booker, chief executive of the bank, said: “There is much work to do, but I and the rest of the management team are confident that under our new ownership structure we are now well-placed to deliver a sustainable improvement in our performance.”

    Euan Sutherland, chief executive of Co-op Group, whose holding in the bank will fall to 30 per cent, said the scheme was a “major step forward in securing the future of the Co-operative Bank”.

    While the debt swap will impose heavy losses on creditors, it won the almost unanimous backing of institutional and individual bondholders in recent weeks. The final outcome was better than an earlier proposal by the Co-op Group, which would have forced bigger haircuts on its bondholders and enabled the mutual to retain a majority stake in the bank.

    The completion of the scheme will enable the bank to raise the required £1.5bn of capital before the end-of-year deadline imposed by the PRA. The Co-op said it would consider a stock market listing next year.