11:28 20 May 2013
Cooperative Bank, a subsidiary of the Co-operative Group, UK’s biggest mutual business, had to reassure its customers fearing a bail out, that it is highly liquid and has strong funding in the light of the sudden resignation of its Chief Executive Officer, Barry Tootell.
The executive’s resignation fuelled the feeling of crisis caused by Moody’s pronouncement that the bank was having trouble keeping the required capital level and had too many losses from bad commercial property loans due to the Britannia Building Society merger in 2009.
Moody’s pronouncements caused the crash in the investment of perpetual bond holders suffering overnight losses as the price of the 5.5555% bond dropped 22% from 75.12p to 53p, and a 13% bond fell 27% from 155p to 113p.
The bank maintains, however, that they have not asked for government support and reassured its customers via Twitter that the bank is very liquid despite the losses from property loans and has high funding profile.
PRA and the Bank of England have taken critical steps to monitor the plans of the bank’s re-capitalizations. PRA has to cautiously strike a certain balance between strict monitoring without running the risk of inducing a bank run.
The Co-Op Bank laid out a solid plan on how to acquire more capital to come up with a comfortable capitalization level: One would be the sales of its general and life insurance resources which are projected to produce about £800million.
This will also bring down the required capitalization. Moody, the credit rating agency, however doubts that this initiative is enough to prop the sagging capital base to satisfy the required level considering the bank’s recent loan losses, ironically, from its non-core investments.
As the newly launched PRA is set to publish the latest capital requirements for all banks in the UK within the month, this could further drive up the gap in the Co-op’s capital level.
Some options can be available to the bank, the sales of the bank, sales of other ancillary assets, the supermarket chain or the funeral business might also have to go.
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