The board of the Co-operative Bank was counting on the deal with Lloyds to secure the Group’s future in banking, according to former Chief Executive Peter Marks.
In the treasury committee hearing, Mr Marks described a Bank that was low on capital and the purchase of 632 Lloyds branches under the Verde deal would have solved this.
Mr Marks, who was a non-executive director on the Bank board, said: “The rationale for me and the Bank board, and the Group board, was that the Bank, in our view, was sub-scaled. It needed to build scale to compete and survive. Verde presented a unique opportunity to achieve that scale and brought with it significant capital.”
Andrew Bailey, Executive Director of banking regulator the Prudential Regulation Authority, visited the Bank board when he was Director of UK Banks and Building Societies under the former regulator, the Financial Services Authority.
Mr Bailey told the board that the Bank needed to deal with five areas of the business, which were capital, liquidity risk management, integration, governance and management. Mr Marks said he “absolutely agreed” with that statement and Verde would have brought capital, a stronger management and computer systems.
Mr Marks told the committee: “We did absolutely believe this was the right thing to do for the Bank. It brought significant benefits to the Bank. I and a number of colleagues thought there was as much risk in doing this deal, as not doing it. The bank was small, it was weak and yes, of course, the deal would have brought risk, but it would have brought benefits.”
The Group was not aware of the capital shortfall until the beginning of this year, according to Mr Marks. But he said this can be traced back to bad debts under the Britannia loan book.
In evidence provided by Andrew Bailey to a previous hearing of the committee, he said a large amount of the losses were due to Britannia. Mr Marks highlighted self-certified mortgages and loans that had “gone sour” as the root cause, though he said the Bank was also a victim of the economy.
Another part of the capital shortfall, according to Mr Marks, is due to the regulator shifting the “goalposts” on capital requirements. “I’m not criticising the regulator, but I think they’ve shifted the goalposts because of what's happened over the last few years,” said Mr Marks. “I’m not blaming the regulator, I’m saying the goalposts have been well and truly shifted.”
During his time at the Group, Mr Marks said the regulator had also told the Bank to reassess its judgements on debts. “We had a letter from the regulator to say that we had to ignore accounting rules and we had to use our judgement in terms of what might go bad,” he said. “So what we’re seeing now is assumptions about the loan book, based on judgement.”
Based on these judgements, Mr Marks said a collective management team decided the economics of the deal did not work. He told the committee: “There was a steering group looking at this project was a combination of the Bank’s executive and the Group executive, which I chaired. It was a difficult decision.
“We got the final business case after lots of due diligence and looking at risk and so on and so forth. The business case was projected over five years and we had used the Treasury model on the prospects for interest rates and GDP growth over the next five years and the economics of the deal just didn't work.”
It was this business case that led to the Group announcing its withdrawal of the bid for the Verde branches in April.