Friday, 22 November 2013

The Co-op Bank scandal

The debacle at Co-op Group and Co-op Bank highlights a fundamental problem for all mutuals or organisations owned and managed on co-operative lines by members. Which is that in order to thrive, they don't just have to be as efficient and successful as conventional companies that have outside shareholders, they have to be, in a broad sense, better than the mainstream [I will come back to what I mean by that]. The structural weakness of mutuals is that they typically don't have access to outside equity capital.

In the case of Co-op Bank, there was and is Co-op Group as the sole owner. But it did not have the resources to supply the £1.5bn of capital needed by Co-op Bank to continue trading. So the rescue of Co-op Bank has been complicated and tortuous - and involves its creditors converting £1.3bn of bonds and preference shares into equity capital and providing a bit more investment on top of that.

The Bank of England remains on high alert, just in case it all falls apart, and it would have to step in with an imposed rescue plan or "resolution" scheme that would protect depositors and the bank's important functions.

It will not have escaped your notice that the appointment as Co-op Bank's chairman of a former local councillor with an apparent taste for hard drugs, a history of downloading porn on to a municipally owned computer and [by his own admission] limited knowledge of modern banking, somewhat undermines Co-op's claims to be better than the rest in both those important senses.

How did he get the job?

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