Co-op Bank bailout – what it means to customers
Why the Co-op needs bailing out, and what it might mean for your money and ethical position.
The Co-operative Bank has been forced to take action to raise £1.5bn after it emerged it had a hole in its balance sheet. Here is what it all means for customers and taxpayers.
Why does the Co-op need the money?
The gap in the bank’s finances is primarily a result of its 2009 merger with Britannia building society. As part of the deal it took on some big commercial property loans, which have resulted in losses. Under City rules, banks need a certain amount of capital in place to be considered stable, and Co-op has had to act to make sure it has enough.
How is it going to get it?
Its plan has been described as a “bail-in” because instead of being handed taxpayers’ money to plug the gap, it is turning to those with a stake in the bank to help it raise funds.
The first £1bn will be generated by an exchange deal with investors who hold “subordinated capital securities” or bonds – they have effectively lent the bank money in return for a regular interest payment. But instead of the interest payment and their existing stake in the bank, they will be offered a choice: they can either take shares in the bank, which will be listed on the stock market; or accept a new investment offering a fixed interest rate. The exchange is expected to happen in October.
The additional £500m will be raised in 2014 from the sale of the bank’s insurance arm and some other assets, and from other cost-saving measures.
Which investors will be affected?
As well as big, institutional investors the move will also have an impact on around 5,000 individual investors who make up about 5% of the bank’s bondholders. Some of these are holders of permanent interest bearing shares (Pibs), which offer high fixed interest rates – in the Co-op’s case, investors were receiving annual returns of between 5.5% and 13%. Instead of getting that cash as expected, and being able to cash in their Pibs at some point in the future for their face value, they will take part in the exchange.
Will they lose money?
It has been suggested that the value of their holdings may fall by as much as 30%. However, this won’t be clear until the details of the exchange have been drawn up.
The chief executive of the Co-operative group, Euan Sutherland, told BBC 5 Live that these investors have “been invested in the bonds for a long period and have had more than their investment back over that period of time”, and that most of those investors have invested less than £1,000. However, he says the group is “very concerned” about doing the right thing by them and is proposing to pay for them to receive independent financial advice.
Will customers lose money?
The “bail-in” is designed to make sure the bank can continue to operate as normal, so customers with current accounts and savings accounts do not stand to lose any cash.
It is always worth remembering that savers in any bank covered by the Financial Services Compensation Scheme (FSCS) will have their first £85,000 protected if that bank fails – if you have more than that in an account with any bank or building society you should consider spreading your money around.
Can Co-op Bank remain ethical?
This is the big question for customers who chose it because of its status as an alternative to the mainstream banks.
The Co-op Group has stressed it will still be the majority owner of the bank, and it is a mutual. Sutherland said that “the ethos, the ethics and all of our banking nature is a key part of our plan that goes forward”. However, the stock market listing for part of it could mean a change of direction if shareholders are keen to see the bank maximise profits.
Andre Spicer, professor of organisational behaviour at Cass Business School, says the change in the bank’s business model “is likely to clash with the co-operative ethos of the bank and, in the longer term, this might undermine what has made the Co-op attractive to its staff and customers.”