Monday, June 24, 2013

(Business) Nationwide and The Co-operative: Britain's best known customer owned banks in capital shortfalls bad news for mutual customers

While it shouldn’t be surprising to find out that banks are low on capital relative to their outstanding loans, the news in recent weeks of customer owned banks such as Nationwide and The Co-operative Bank having capital shortfalls running into the billions was clearly a shock. An awful lot of banks are undercapitalised and banks like the Co-operative Bank and nationwide are considerably less so than their commercial competitors but it does put a dent into the notion that customer owned banks are exempt to the laws of modern capital.

It is not looking good for the cooperative as banks of their nature that look to get listed on the stock market do not fare very well as going public is often a sign that things are going to plan as the process of going public is notoriously strenuous. The history of “demutualised” banks has been a tale of woe as the fates of banks such as Northern Rock and Halifax begs the question that is it wise to “think that thestock market is the answer for Co-op Bank?[1]

The answer is clearly no but for a bank in trouble, it’s clear that the co-operative Bank have no choice. Having suffered a downgrade of it’s debt at the hands of Moody to “junk status”, The Cooperative would find it harder to pay their debts as the downgrade will see the cost of their debt go up[2]. All in all, it’s not been a fantastic 2013 as the bank revealed a £600m loss and embarrassingly had to back out of purchasing “632 branches from Lloyds Banking Group”[3].

And it look like it might get worse as the banks looks set to enter the risky and reputation destroying unsecured loan market which could see the bank pick up a number bad loans or loans that the borrower cannot pay back which may lead to an increasing the chance of borrower defaults[4].

While Nationwide’s troubles are no way near as deep as the Co-operative Banks, the news of a capital shortfall did raise eyebrows especially with the state of the Cooperative’s Banking arm. While Graham Beale, Nationwide Chief Executive, may rue the Prudential Regulation Authority determination of its capital shortfall as he suggests that new rules would “unfairly penalize lower-risk lenders like building societies”[5] and ignores other factors that might affect the capital shortfall, the bank still plans to “raise up to 500 million pounds through an issue of so-called core capital deferred shares”[6].

In sum, it hasn’t been a great few weeks for best known customer owned banks as both have capital shortfalls and one of them has listed itself on the LSE in order to raise capital, which is not good news in any sense of the word for the customers and soon to be shareholders of the Co-operative Bank. 

[1] P.Collinson, 2013, The Co-operative Bank Bailout is a blow to mutuality,
[2] R. Neate and J.Treanor, 2013, Co-operative Bank rushes to Reassure customers after downgrade,
[3] Ibid
[4] N.Goodway, 2013, Troubled Cooperative Bak unvieils rescue plan to plug £1.5bn hole in balance sheet,
[5] S.Williams, 2013,  Nationwide Boss Hits Out at Regulator’s New Measures,
[6] Reuters, 2013, Nationwide draws up plan to plug 1 billion capital hole-report,

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