Wednesday 15 February 2017

Co-op Bank goes down, but who is to blame?

I'm sad that the Co-op Bank, with which I've had an account for may years, is giving up in its present form and seeking a buyer.

Many people, when they read of its demise, will immediately think of, and blame, its inadequate former chairman, the Non-conformist  minister Paul  Flowers, who was later found to have drug problems and so nicknamed Crystal Methodist.  It is easy to conclude that mutual ownership is not viable for serious businesses as amateurs on the board are not up to the job.

But it is universally agreed that the Co-op Bank's troubles began with the takeover of the Britannia Building Society in 2009.  True the Co-op was probably over-ambitious, but it is too easy to forget that the take-over was given the green light by the privately owned giant  accountancy firm KPMG.  Later, too late for the Co-op to back out, a "black hole" discovered in the Britannia's accounts.

Presumably a fully professional board would have put their trust in the mighty KPMG just as the amateurs did.

There was a similar piece of amazing incompetence from an established part of the professional "finance" industry when the Icelandic banking system ran into trouble. Up to a month before the collapse Iceland's sovereign debt was given A ratings by all four of the major credit rating agencies. Several UK local authorities which had bought Icelandic bonds in good faith were caught out (and, I think, were actually compensated by the UK government - see here).

We need to ask whether the ratings of these agencies are really meaningful and whether the accountancy industry, concentrated as it is on the "big four" (KPMG, Deloitte, PwC and E&Y) is really fit for purpose.

A final point in favour of the Co-op Bank is that, when in difficulties, it rescued itself without calling on public funds, unlike  the Royal Bank of Scotland and Lloyds Banking Group, both of which needed to be bailed out with taxpayers' money.

So there are no grounds for  Co-op Bank's unfortunate setback to be used as evidence for a loss of confidence  in co-operative and mutual ownership


  1. With Labour government encouragement and support, lloyds Bank rescued HBOS without proper due diligence.

    It is the losses and mis-selling at HBOS which caused the government to have to bail out the combined Lloyds/HBOS.

    The government will shortly be sellingits last remaining shareholding in Lloyds - the government and the bank of England having made a substantial combined profit and loss from the loans and investments.

  2. The Co-operative Bank's merger with the Britannia building society in 2009 should never have happened, a major review of the organisation has said.

    Sir Christopher Kelly's report blames the deal for the bank's near-collapse last year.

    His report states both companies had problems that were exacerbated by the merger.

    It also points to failings in management and governance "on many levels".

    Sir Christopher added the deal might have worked had the organisation received first-class leadership, but "sadly it did not".

    Sir Christopher told the BBC's Radio 4 Today programme: "It is the merger [between the Co-op Bank and the Britannia], not the Britannia itself that caused the problems."

    He said both organisations brought problems to the deal.

    In Britannia's case, it was the vast size and unwieldiness of its commercial property loan book.

    But the Co-op Bank had several problems of its own, including its approach to risk when lending money to customers and a large IT project that was already under way, which the merger "vastly complicated" and which ultimately contributed £300m to the bank's eventual capital shortfall .

    Sir Christopher added that the Co-op Bank "had a legacy of mis-selling payment protection insurance (PPI), which was not unusual at the time, but is particularly disappointing for an ethical bank".

  3. "A final point in favour of the Co-op Bank is that, when in difficulties, it rescued itself without calling on public funds..."

    Yep - it went to the hedge funds instead....

    1. Unknown: Yes, it is disgraceful that the Co-op joined the private sector banks in mis-selling PPI - we expect better from an organisation that claims to be ethical.(Weren't all banks ethical at one time? Both Barclay's and Lloyds were founded by Quakers) I don't argue that the Co-op's management is above reproach - at a minor level its internet banking site is by far and away the most difficult I have to navigate, and its various "upgrades" seem to make things worse. I suspect the Kelly report went out of its way to spread the blame rather than place too much emphasis on the failings of KPMG

      Anonymous: Agreed, I'm not too happy about hedge-funds. My point is that the right make a great fuss about "taxpayers' money" being misused, so it's worth pointing out that no public funds were involved in the Co-op's rescue, whereas I believe the private sector RBS (in the news yesterday for alleged further dubious practises)has so far received £50bn of public money in three rescues and is still not out of the wood.