(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
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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Some local authorities have withdrawn funds from the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)
Keywords: BREAKINGVIEWS CO OP/
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