Could the Bank of England end up taking over the Co-op Bank?

One of the consequences of the credit crunch and the consequent banking bailouts is the way that the banks dominate financial life. We can in fact take that further because in the same way that British Airways was described as a pension fund with an airline subsidiary can we now be described as a financial sector with a real economy subsidiary? It so often feels like that.

Actually there is some fascinating number-crunching we can do as banks interact with central banks and as so often ECB (European Central Bank) gives us food for thought. Earlier @insidegame pointed out this.

ECB deposit facility usage €495.763 billion.

Interesting that banks are so willing to deposit at an interest-rate of -0.4% is it not? That hardly suggests confidence in the system. Well there is another 955.27 billion Euros held by them in the ECB current account at the same -0.4% interest-rate. Indeed at a time of apparent economic success someone is also borrowing some 590 million from the Marginal Lending Facility.

Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;

There is more to consider as we note that what is supposed to be a penal interest-rate is a mere 0.25%.

Co-op Bank

This is an institution about which Taylor Swift might well have written “trouble,trouble,trouble” for. This morning the Co-op group has announced this.

As a minority investor in The Co-operative Bank, the Co-op Group is supportive of the plan to find the Bank a new home. We will continue to work with the Bank and other investors through the process. We are focused on finding the best outcome for our members, two million of whom are Bank customers, as well as the members of our shared pension scheme which is well funded and supported by the Group. Our goal is to ensure the continued provision of the type of co-operative banking products our members want.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis.

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

The shares are privately owned so prices are not published but we are told this about trading and prices.

Shares in the Manchester, England-based lender, which don’t trade publicly, are quoted between 10 pence and 30 pence by investment banks offering private trading among institutional investors, said the people who asked not to be identified because they weren’t authorized to speak publicly. The shares were worth about 3 pounds after the bank was rescued by bondholders in 2013, falling to about 50 pence in September before plummeting in recent weeks amid questions over its financial strength, the people added.

There are two initial issues raised by this. The first is that “worth” is not the same as price and related to that I would say that the £3 price after the 2013 rescue was a combination of a false market and wishful thinking. In a closed private market, how can I put this? You can pretty much price it as you like and wait and see if anyone is silly enough to buy at that price? I think we are clear now that the answer was no! So the fall in the price has in my opinion been more an acquaintance with reality than any real change.

The institution would already have been on the radar of the Bank of England.

Co-Op Bank will probably operate below regulatory capital guidance until at least 2020, the bank said Jan. 26, as it replaces crumbling IT systems and separates its pension fund from its former parent.

One thing that raises a wry smile is that the banks are always described as having “crumbling IT systems”. How can this be when pre credit crunch we were told that they were run by people of such talent that they deserved vast salaries and remuneration packages? Someone should try a case for miss selling there. I believe the Co-op Bank has now outsourced such matters to IBM.

The Prudential Regulation Authority or PRA has been looking into this although its moves are awkward in the sense that they give the Co-op bank another downwards push.

The PRA increased its so-called Pillar 2A capital requirements, financial buffers linked to a lender’s idiosyncratic risks, to 14.1 percent of risk-weighted assets in November. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.

Bonds,Bonds Bonds

There is no bull market here indeed we see the reverse as the Co-op Bank’s bonds have seen quite a bear market.

The bank’s 206 million pounds of junior bonds due December 2023 dropped 4 pence to 45 pence on the pound on Wednesday, according to data compiled by Bloomberg, while 400 million pounds of senior bonds maturing in September this year were little changed at 85 pence, with a yield of 34.5 percent.

In these times of zero and indeed negative interest-rates which we reminded ourselves about at the opening of this article an interest-rate of 34.5% can be described thus.

Danger, Will Robinson! Danger!

The official view is quite different as the BBC explains.

The bank has four million customers and is well known for its ethical standpoint, which it says makes it “a strong franchise with significant potential” when it comes to a sale.

This seems like a reality was a friend of mine moment, or of course perhaps viewed through the prism of its previous drug-taking chairman Paul Flowers, who pursued the new methods of counting GDP with quite an enthusiasm. Meanwhile the last Fitch Report told a different tale.

Co-op Bank’s relaunch is crucial for it to become a viable business, but losses and capital erosion continue to hamper its progress. We expect Co-op Bank to report losses until at least 2017, and significant investment in new systems could extend losses into the medium term. Profitability should begin to benefit in 2018 when fair value adjustments related to the 2009 acquisition of Britannia Building Society are fully unwound.

Comment

This is a sad, sad story as there is much to recommend mutual organisations although of course much of that disappeared in the 2013 rescue. When the credit crunch hit there were hopes ( including mine) that the mutual system might help but sadly it has done little if any better than the share owned banks. The same greed culture ravaged it and may yet ravage us as taxpayers. This is particularly disappointing from an organisation which has promoted itself ad being based on ethical foundations.

Right now the Bank of England will be trying to encourage and goad someone into buying this. The problem is that the shortlist at the moment has one maybe which is the TSB. The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning. A bit like the rule that you never buy a share until the third profit warning. After all if the outlook was good the hedge funds would keep it wouldn’t they? So there remains a genuine danger that the Bank of England will end up stepping up and apply its new bank resolution procedure. At such a time it would be on my timeline for such events.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

As to the individuals concerned there is this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforeseen difficulties”.

 

 

 

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15 thoughts on “Could the Bank of England end up taking over the Co-op Bank?

  1. Hi Shaun
    Thank you for another enlightening piece on
    a frustrating subject.
    What are the odds that all of the LT2 group
    investments were covered by TPTB from 2013 and
    please note in the link below, the lloyds banking group
    connection.

    http://www.telegraph.co.uk/finance/10425199/Who-are-the-funds-which-will-own-the-Co-op-Bank.html

    Wouldn’t it be great if many people signed a petition against
    government support for the Co-op in the future, something
    along the lines of :-

    Dear Chancellor,
    It is clear that the Co-op bank is, and has been
    in an untenable position for some time.
    We,your voter’s, expect you to make the only
    sensible decision and allow the bank and its creditors to face
    THEIR OWN losses.

    I couldn’t resist ending with a song for the Rev Paul Flower’s

    JRH

    • Hi JRH

      You make an interesting point which I do not think has been fully tested by the bank failures we have seen which have been mostly in Europe. What I mean by that is whether legislation covers deals which no doubt will be argued were based on previous rules?

      As to the music well allegedly this is something Paul Flowers liked.

  2. Handing over their IT systems to IBM might have been timed better given the latter’s on-going program of “downsizing” and “off-shoring”.
    On the topic of the mutuals and 2008, I seem to recall that by then most of the larger building societies had been converted into share-based companies by the simple expedient of offering money to their members in exchange for their votes ( for some reason I can’t quite pin down the phrase “carpet baggers” comes to mind).

    • Hi arrbee

      When organisations get into a malaise of trouble then everything seems to get done at the wrong time so your description of the state of play at IBM seems somehow fitting. I have to confess I was party to some of the carpet bagging as I got £100 or so from the TSB and Abbey demutualisations, So small fry but nonetheless….

  3. An ‘ethical’ failed bank…………………….oh the irony.

    I welcome the idea of mutuals but I do wonder how institutions that set out to broaden home ownership amongst their membership ended up broadening it amonsgt Buy To Let Landlords thereby denying their members affordable housing?

    I wouldn’t touch the co-op bank with RBS’s barge pole.

    • Hi Dutch

      Pure greed I am afraid. Whilst I too hope that mutuals will do better the sad fact is that pre credit crunch they mostly behaved as badly as the shareholder owned companies. Mostly I think because they recruited amongst the same corrupt “elite”.

  4. Why, since mutual do not have customers, only members, and since those members have voting rights, and hence, a say in policy, are mutual covered by the fscs?
    Surely another case of moral hazard?

    • Hi therrawbuzzin

      That is a good question although of course members rights have been downgraded in so many places and indeed ended for new joiners. A bit like final salary pensions.

      The PRA simply ignores it.

      “A ‘building society’ is defined by the Building Societies Act 1986 (7MB). According to this Act, a society may be established as a building society if its purpose or principal purpose is that of making loans which are secured on residential property and are funded substantially by its members. The 1986 Act also contains requirements regarding the constitution and powers of a building society.”

    • Conversely, if not covered by the FSCS and said Building Society becomes insolvent, then, free of any incumbrances applied by FSCS regulation and worried athatthere is no safety net if it fails, it is open for the Society to behave very badly towards it’s mortgage holders in order to try to increase cash flow, thereby creating untold financial hardship and suffering for borrowers, particularly if the number of saver members is greater than the number of loan members. Remember, in a mutual it’s one person one vote, the amount saved or borrowed by each individual is immaterial.

    • Hi Foxy

      In a way yes but it did not turn out so well for Spain with its cajas. On that subject we saw more bad news this evening. From Reuters.

      “MADRID, Feb 13 The Bank of Spain’s former head and seven other Spanish regulatory officials will be placed under investigation over their roles in the ill-fated listing of the now state-controlled bank Bankia, a court ruled on Monday.

      The Bank of Spain said three of the eight – all top officials from its supervisory and inspection units – would resign on Tuesday because they did not want to affect the central bank’s functions while testifying as part of the case.”

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