(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By George Hay
LONDON, June 4 (Reuters Breakingviews) - The UK government needs to stop dithering over the Co-op CPBB_p.L. Weeks after a six-notch downgrade to junk status and a self-imposed shuttering of new corporate lending, the mutual is still waiting for the UK regulator to nail down how much capital it needs. The continued uncertainty increases the risk that corporate deposits walk.
It’s not surprising that Co-op savers are jittery. Stressing Co-op’s loan book to endure the kind of Doomsday-style losses suffered by Lloyds Banking Group (LLOY.L) in Ireland – including 91 percent non-performing real-estate loans – would mean a capital shortfall of 777 million euros to maintain a core tier 1 ratio of 7 percent under Basel III capital rules, according to Morgan Stanley.
But this could be raised via a sale of Co-op’s life and general insurance arms, and retaining earnings this year and next. So bondholders and depositors would be spared a Cyprus-style bail in.
Of course, this scenario requires the regulator to give Co-op more time than it has given peers to reach the required capital strength. But it’s hard to see why it wouldn’t. Unlike European neighbours, the UK sector is overly reliant on private-sector banks with mutual lenders relatively under-represented.
Much depends on how big the Co-op’s capital hole really is. So long as it is well short of 1 billion pounds, a so-called liability management exercise – polite talk for repurchasing outstanding bonds at a discount – could just be an add-on that raises further capital. Holders of Co-op’s 1.3 billion pounds of subordinated debt could be made an offer to sell out at slightly above the 60 to 70 percent of face value where the bonds trade. But if the hole is bigger, the exercise would become more important, and some kind of coercion could be needed.
The regulator may feel that the Co-op’s relatively plentiful liquidity – over 10 percent of its assets are cash – and a handy 900 million pounds of cheap Funding for Lending liquidity means it has time to play with. It’s a big buffer, which may explain the government’s seeming lack of urgency in fixing the situation. But a depositor run would make things much tougher. It should get a move on.
- Some local authorities have withdrawn funds from the Co-operative Bank since the UK mutual suffered a six-notch downgrade by Moody’s in May, according to a person familiar with the situation. The moves were reported first in the Financial Times on June 1.
- However, some funds had been re-deposited with the bank at higher rates of interest, the person added.
- Co-op drew down 900 million pounds of cheap liquidity from the UK’s Funding for Lending Scheme in the first quarter of 2013, Bank of England figures revealed on June 3.
- Reuters IFR: Britain’s Co-op Bank targets bondholders to plug shortfall [ID:nL5N0EF23R]
- For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and Sarah Bailey)
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