Co-op crises shows regulator weakness

Six million customers are likely to worry as the Co-operative Bank is struggling for independent survival.

The estimated £1.8 billion hole in the Co-op Bank’s balance sheet will test the City’s new, post-crisis regulatory regime.

But earlier this year the Co-op planned to expand by absorbing 631 branches discarded by the Lloyds Banking Group.

The Co-op owns businesses from supermarkets to insurance — and now it will have to sell its assets.

The misfortune may be a cause for Schadenfreude in parts of the Jewish community as the Co-op was one of the largest commercial groups in Britain to back the boycott of produce from the West Bank and Gaza.

In addition, the bank is chaired by Methodist minister Paul Flowers — the highest level supporter of the boycott campaign on the Co-op board.

The bank’s current problems partly stem from errors made by the defunct Financial Services Authority. In 2009 the FSA approved the merger of the Co-op Bank with the Britannia Building Society. It is loans made by Britannia that are at the core of the Co-op’s current difficulties.

Responsibility for ensuring the safety of the Co-op shifted this year from the FSA to the Bank of England.

The Bank’s Prudential Regulatory Authority is responsible for policing financial institutions. The newly formed Financial Policy Committee, run by deputy governor Paul Tucker, is responsible for maintaining the broader stability of the system.

Tucker has created a “resolution regime” to avoid spending taxpayers’ money. In the face of difficulty, the healthy part may trade again while the “bad bank” is placed into receivership.

In contrast to the United States — where banks rescued in the financial crisis are returned to the public markets — the government controlled British banks, Lloyds and Royal Bank of Scotland, are still in taxpayers’ hands.

After all the care taken to make Britain’s banks safe again, the crisis at the Co-op Bank will remind depositors of the risks that still exist in the banking sector. That may well make investors more cautious about putting money into a reconstructed Lloyds or RBS if they were to be brought back to the stock market.

It has been possible in the US where the recovery of the financial system has been more robust with losses recognised aggressively. If similar ruthless steps had been taken earlier in the UK, our banking system might well have returned to stability.

Alex Brummer is City Editor of the ‘Daily Mail’

Last updated: 10:45am, May 27 2013