What went wrong at the Co-op Bank?

Co-Op bank

As a sobering assessment of missed warnings, leaders that could not see the wood for the trees and a failure of governance at a bank that very nearly went bust, Sir Christopher Kelly's report on the debacle at the Co-op Bank will take some beating.

As the BBC revealed last week, the Kelly report says the root cause was the attempt to take over the Britannia Building Society. Sir Christopher says the merger "should probably never have happened", a view that could equally legitimately be taken about Lloyds Bank's takeover of Halifax Bank of Scotland. Or the Royal Bank of Scotland's calamitous attempt to buy ABN Amro.

The Co-op saw Britannia as an easy route to retail customers and a ready-made branch network. It received into the bargain a mass of commercial property assets "outside its risk appetite", according to Sir Christopher. Britannia had loan-to-value ratios - a key test of the stability of a bank - that should have made the board wince. Due diligence was "cursory" and what is known as the "fair value adjustment" - reporting the true value of assets and liabilities at the time of the deal - proved "woefully inadequate". It estimated a £284m adjustment downwards. The actual figure was later revealed to be £802m.

Sir Christopher says "the Regulator did not object" to the deal. Why the Financial Services Authority kept quiet is a reasonable question, given that it had put Britannia on its own private "watch list" as an organisation in trouble.

The report says that on capital "forecasting and planning" were poor at the Co-op, the bank's board was "ill-informed" and managing day-to-day budgets appeared more important than ensuring a healthy balance sheet. Key executives had little or no banking experience, Sir Christopher says. The person put in charge of the bank's strategy post-merger was an expert in human resources.

On top of the bank's struggles to integrate the Britannia, the Co-op Group Board applied two further stresses - Project Unity, to bring together functions at the Co-op Group and the bank; and an attempt to buy 632 branches owned by Lloyds Bank. It was like attempting to fit after-burners on a Trabant.

Sir Christopher touches on the culture of the Co-op, a section of the report which should be required reading for any budding management gurus out there. His report says there was a willingness to accept poor performance, a tendency to promote good news over bad and a dislike of challenge. Niall Booker, the present chief executive of the Co-op Bank, insists that that culture is changing.

After its near collapse and restructuring, the Co-op Bank was bought by a number of American hedge funds and Co-op Group's stake fell to 30pc. Attention will now turn to the lessons in Sir Christopher's report for the Group, which has its key annual general meeting on May 17.

What it says of governance will be the key. Will members be convinced by Sir Christopher's finding that "the methods used over the last few years to appoint members of the board have led to serious failures". Will they vote through governance reforms? Many argue that the future of the Group hangs on reform and that the banks which are supporting the Co-op Group despite quite eye-watering losses will demand action. Sir Christopher's report is likely to strengthen the resolve of those who argue that without reform, Co-op Group will not have the tools to fix itself.

Kamal Ahmed Article written by Kamal Ahmed Kamal Ahmed Business editor

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  • rate this

    Comment number 66.

    59.FreemanFlyPerspective - I wish people would stop with this idiocy of "They are not capitalists, but corporate socialists" and referring to how the rich run the world as socialism for the rich. The system is Corporate Capitalism which has been busy deregulating for the past 20 years. This is the complete opposite of socialism. Stop it with your Libertarian crap. We had free capitalism it failed

  • Comment number 65.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 64.

    I have been watching with interest the detailed coverage of the many troubles at the embattled Co-op. However, I believe you have failed to report something fairly significant. The recent resignation from the board of Stuart Ramsey for leaking sensitive information to scare-mongering journalists. I don't think the true impact of these leaks on colleagues was ever considered before going to press!

  • rate this

    Comment number 63.

    Aha another bought of Co-op bank bashing by the BBC. I'm not going to deny it was also run by overpaid, egotistic incompetents, but then hey, so is/was every other bank. The Co-op's biggest mistake was not to plead near bankruptcy back in 2008 and get a massive bailout at the expense of normal people everywhere.

  • rate this

    Comment number 62.

    RE: 61 - Google Global Research/bank bail-ins for how bankers are finalising plans to plunder bank accounts after the next crisis they cause: "According to the Institute of International Finance: “Hitting depositors with Cyprus-style bail-ins” could become the standard response to crises (endorsed by ECB & IMF), serving the interests of the global financial conglomerates.” (Economic Times, 2013).

  • rate this

    Comment number 61.

    Correction re: #59. It was Mr Sands of Standard Chartered who was one of the architects of the corporate welfare/reverse redistribution of wealth/socialism for the rich taxpayer-funded bailout of reckless bankers in 2008. Google Global Research "eurocrats authorise bail-ins") or Global Research/bail-ins for how the bankers are finalising plans to plunder accounts after the next crisis they cause.

  • rate this

    Comment number 60.

    More money is made by the leaching high paid in companies if the deal, any deal, goes through. They always walk away vastly richer, it is the little people, shareholders, that lose. There has to be dome rebalancing in the amounts employees take out of companies for themeslves, so more get to those who deserve it the owners, largely pensions funds. Those funds also need the same treatment to staff.

  • rate this

    Comment number 59.

    Banks coerced puppet politicians into bailing them out (one advocate of bailout was Mr Peace of Standard Chartered (SC fined $667 million for money laundering in 2013). They are not capitalists, but corporate socialists who privatise profits in good times then create crises & socialise losses onto taxpayers. Next is a roll-out of the Cyprus-style bail-in, taking your money. Google Global Research.

  • rate this

    Comment number 58.

    54.WebsterTarpley "The momentum is with money reform" Empty rhetoric. I have watched 97% Owned and agree with its description of how the banking system works. But I asked you to address the concerns raised by http://www.ukcolumn.org/article/problem-positive-money

    No one has done so, apart from saying 'Monetary Policy Committe of B of E could be re-structured'. How exactly? Vested interests!

  • rate this

    Comment number 57.

    check out what was done to Hibu/Yell shareholders by the directors if you want a story to beat this one Kamal. A contrived default on debt and then in cahoots with the administrators the lenders get handed a great company!

  • rate this

    Comment number 56.

    @53 - Your question was addressed at #52. A 400 character comment box on a HYS doesn't offer the ideal way of getting into a more detailed discussion on some of the debates surrounding possible different models for implementing the replacement of private bank-created debt money with debt free money and banking reforms to avoid crashes such as 2008. As #54 says - why not do some research yourself?

  • rate this

    Comment number 55.

    Quite funny this story. As it comes almost 6 years after the banking crisis which gave us the financial crash its quite funny that no legislation has evolved which would have prevented it. 6 years and despite what Cameron/Osborne/Cable and the rest have said not one statute exists on banking regulation.

  • rate this

    Comment number 54.

    @48 - Maybe you should decide for yourself by going to Positive Money's website and going through all of Positive Money's detailed proposals for money & banking reform and also click on their link to the page where Martin Wolf of the Financial Times gives detailed reasons as to why he supports Positive Money's proposals. You could also watch 97% Owned on Youtube. The momentum is with money reform.

  • rate this

    Comment number 53.

    48. - Come on guys you shout out about "Positive Money" and I then post a link and ask you a simple question, but instead of answering in the good old democratic debating way you just merely mark down because you didn't like being asked to explain. Poor show.

  • rate this

    Comment number 52.

    @48 - UK Column support the proven concept of replacing bank-coreated debt money with a Treasury-issue, debt free; interest free system (e.g Bradbury Pound/Lincoln's Greenback). Seems they have some concerns on some of Positive Money's proposals, but maybe they misunderstand that the Monetary Policy Committe of B of E could be re-structured to make it "independent, accountable and transparent”.

  • rate this

    Comment number 51.

    This is not about the Co-op, this is about the blinkered greed of Banks and the complicity of those that are supposed to regulate them. This is a small fish offered to us in the hope that we will ignore the larger "sharks" that are still circling, their waters being kept clear of obstruction by our "paid politicians" of all parties.

  • rate this

    Comment number 50.

    National debt is unnecessary, as is austerity for poor & middle classes, while reckless banks receive bailouts & corporate welfare (socialism for the rich). Reckless banks should not create money as debt. Govt can and should issue debt free/interest free/low inflation money instead of borrowing. Google the Bradbury Pound/Secret of Oz/97% Owned; prosperityUK. & PostiveMoney which the FT now backs.

  • rate this

    Comment number 49.

    Well the lefties are out in force downgrading all comments that it was a socialist model that never works. This comment will also be downgraded by the same blind socialists that voted Brown/Blair into office. The Co-Op is a dysfunctional socialist model that needs to be scrapped. End of story

  • rate this

    Comment number 48.

    38.Bill_Still_and_The_Secret_Of_Oz - I just Googled "Positive Money" and got this: http://www.ukcolumn.org/article/problem-positive-money

    Seems it's not a very good idea at all. What do you make of it? It does seem crazy that banks create 97% of the World's money from thin air and that Central Banks bail them out by making money out of nothing, but positive money changes nothing.

  • rate this

    Comment number 47.

    @38: BBC still hasn't covered this: "Positive Money’s proposals have been advocated by Martin Wolf, chief economics commentator at Financial Times, in an article entitled “Strip private banks of their power to create money". Wolf highlights the fact that the ability of banks to create money (as debt) requires governments and taxpayers to underwrite the banking system." Google Positive Money! Agree


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