Regulator warns Co-operative Group about capital in 2011

Two years ago the financial regulator warned the Co-operative Group board about a capital shortfall in its banking operations.

Two years ago the financial regulator warned the Co-operative Group board about a capital shortfall in its banking operations.

Andrew Bailey, Chief Executive at the Prudential Regulatory Authority (the current regulator), said that when he was working at the former regulator, the Financial Services Authority, he had told the Group board that more capital was needed.

At a Treasury Committee investigation earlier this month into the Co-operative Group’s failed acquisition of Lloyds branches, Mr Bailey said: “Going back to the outset of that whole process, which was about two years ago, when it was first an idea, I said to the board of the Co-op Bank that in my view — and I have to say it was a view without having done the stress test that was subsequently done — they needed to raise capital.”

Responding to questions from the committee’s Conservative MP Jesse Norman, he added: “Towards the end of 2011 we made it clear to them that — and I will use these words carefully — it was not clear to us that the Co-op Banking Group had the ability to transform itself successfully and sustainably into an organisation on the scale that would result from acquiring the Verde assets.”

During the same conversation with the Co-operative Group, he said the board were told about five areas of the business they had to deal with, which were: capital, liquidity-risk management, integration, governance and management. He added: “Verde would have brought to Co-op three things: capital, because Lloyds was putting capital in; management; and IT systems, all three of which would have been of benefit to Co-op.”

In the second half of 2012, the regulator carried out a stress test of the Co-operative Bank and Mr Bailey highlighted that Britannia assets were the “main issue” in the capital shortfall. The test revealed, said Mr Bailey, that the Bank needed more capital and that “Verde would have brought some capital in, but in our judgment not enough”.

He said the Group had signalled they were going to sell the insurance businesses to bring more capital in. He told the Treasury Committee: “Our assessment again was not that they needed to raise capital. I said to them they needed to bring capital in.”

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