THE merger of the Co-operative Bank with Leek based Britannia Building Society in August 2009 was a major source of the Bank’s subsequent difficulties an independent report has stated.
The report is the result of an independent review of the events which led to the £1.5 billion capital shortfall announced by the Co-operative Bank in June 2013.
Announcing his finding on what went wrong Sir Christopher Kelly said: “At the time, the Co-operative Bank was a small, full-service bank with a high cost/income ratio, which led to modest profits.
“Britannia was the UK’s second largest building society. It stood out from its peers in the extent to which it had expanded beyond conventional residential mortgages. Other lending, including a £3.7 billion corporate book composed largely of commercial real estate loans, accounted for as much as half of its lending (and a greater proportion of its regulatory capital). The Co-operative Bank wanted Britannia’s personal customers and retail branches. “In acquiring them, it also got saddled with a substantial volume of assets well outside its risk appetite in terms of type, loan-to value or concentration risk.”
Sir Christopher also states that a number of factors contributed to the debacle of the capital shortfall and the subsequent restructuring: These included:
* The economic environment.
* Increasing capital requirements imposed on banks in general following the financial crisis, and on the Co-operative Bank in particular as a consequence of specific issues that it needed to address.
* The merger with the Britannia Building Society in 2009.
* Failure by the Bank after the merger to plan and manage capital adequately.
* Fundamental weaknesses in the governance and management of risk.
* Material capability gaps, leading to a serious mismatch between aspirations and ability to deliver.
* Past mis-selling of payment protection insurance (PPI).
* A flawed culture.
* A system of governance which led to serious failures of oversight.
Sir Christopher adds: “This report tells a sorry story of failings on a number of levels. The Bank Executive failed to exercise sufficiently prudent and effective management of capital and risk. The Banking Group Board failed in its oversight of the Executive.
“The Group Board failed in its duties as shareholder to provide effective stewardship of an important member asset. Collectively, they failed to ensure that the Co-operative Bank consistently lived up to its ethical principles. In all these things they badly let down the Group's members.”
Richard Pennycook, Interim Group Chief Executive of The Co-operative Group, said: “Following the wake-up call of our recently announced £2.5bn loss, Sir Christopher Kelly's report today lays bare the failings of management and governance that caused it.
“It is a sobering assessment which shows clearly that The Co-operative Group's loss of control of its Bank could have been avoided. The management that instigated this disaster for the Group are no longer in place; the flawed governance structure that failed to apply the right checks and balances, however, remains. Our colleagues, our members and our customers now look to the Group and Regional Boards to deliver the reforms which are so clearly necessary.”
Ursula Lidbetter, chair of The Co-operative Group, said: “Sir Christopher Kelly’s report serves as a stark reminder of the scale of change required in the governance of The Co-operative Group – something we have been clear we are already committed to. We thank him for his detailed and thorough work.
“The Group Board is leading the governance reform process and is putting a resolution containing four key principles to our membership next month.
“The Board awaits with keen interest the Governance Review to be published shortly by Lord Myners. Sir Christopher’s conclusions must strengthen our collective resolve, underlining as they do the urgency of the need for far-reaching fundamental change. We must ensure the mistakes of the past are never again repeated.”