Co-op Bank in crisis as small business loans halted

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   By Martin Kelly

The Co-operative bank is facing the prospect of a taxpayer funded bail-out after a capital shortfall led to a withdrawal of loans to new corporate businesses.

In a significant announcement today, bosses at the bank confirmed that it had stopped offering loans to new businesses amid concerns that it did not have enough capital in reserve.

In a statement, a spokesman for the Co-op said: “Following the appointment of (CEO) Euan Sutherland, the group started a review of the Co-operative Bank, its capital and lending position and its commercial strategy.

“That review is ongoing, however an early decision was to confirm that the primary focus of the banking business is to be directed at serving and expanding our presence amongst retail customers whilst continuing to support our existing business customers.

“This is in line with our previously taken commercial, strategic decision that we would focus our energies and capital on these sectors of the market and would not, at this time, grow our corporate lending business.

“We are, therefore, no longer lending to new corporate customers.”

The shortfall is estimated by analysts to be around £1.8bn and there are already suggestions that a taxpayer bail-out may be required.  Other suggestions include splitting the bank in order to separate the toxic debts from the good business.

The news is being seen as a major blow to the UK government which has been trying to encourage banks to lend to small and medium businesses in order to help stimulate the flagging UK economy.  Co-op has around 100,000 small and medium-sized business customers, attracted by its claims to offer ‘ethical banking’.

The Co-operative Bank’s problems began in 2009 when it acquired the Britannia, then Britain’s second-biggest building society.  Co-op inherited £11bn of toxic loans from Britannia which contributed to a £662m loss last year.

The bank is currently in talks with the City watchdog the Prudential Regulation Authority which are expected to take between four and six weeks.

Earlier this month, credit agency Moody’s downgraded the bank to junk status which led to fears that a taxpayer bail-out would be required.  However the bank moved quickly to deny this was a possibility.

An arm of the Co-operative Bank, the Unity Bank, is closely associated with the Labour party and the trade union movement.  The bank is the Labour party’s major creditor, having loaned millions to the cash-strapped party.  In 2006, the Daily Telegraph reported that the Co-op Bank had extended Labour’s loan overdraft to £11m, and criticised the bank’s reluctance to discuss the nature of its relationship with Labour.  The bank also reportedly made a loan of £3.5m to Labour, secured on the party’s headquarters.

Earlier this month the Times newspaper reported that the Labour party is dependent upon an overdraft of £3.9m with the Co-operative Bank, which is held on terms very favourable to the party.  A bailout and sale of the troubled bank may lead it to revise the terms of Labour’s overdraft, causing the party severe financial difficulties.

The Co-operative Group is also the sponsor of a number of Labour MPs and former MPs, including George Foulkes (now Lord Foulkes of Cumnock) who sat in the House of Commons as a Co-operative party MP.  The Co-operative party was established in 1917 as the political arm of the Co-operative Group. Although it is a separately registered party, all Co-operative party election candidates are jointly nominated as Co-operative/Labour following an agreement made in 1926.

Since party funding records began, the bank’s donations to the Co-operative Party have been increasing, from £228,893.25 in 2001 to £809,000 in 2011.  The Group have donated directly to Labour as well, giving as much as £89,356 in 2004 and £50,000 in the first quarter of 2012.  However, the Co-operative Party also donate to Labour, giving an average of over £100,000 a year between 2001 and 2011.

Labour is also one of the organisations, and only political party, to benefit from indirect donations from the Co-operative Bank credit card schemes, which has so far raised over £2m for the party.

Just two weeks ago, on the same day that ratings agency Moody’s downgraded the bank to “junk” status, Mr Foulkes insisted that the Co-op bank was in “good health” and tweeted:  “absolutely clear they have the liquidity, they’ve got the funding … to meet all the requirements”.

Last July, Labour leader Ed Miliband hailed the Co-op Bank as his preferred model for banking reform, saying that the bank had “always understood that ethics of responsibility, cooperation and stewardship must be at the heart of what you do.”