The long, agonising road of the Co-op bank’s demise appears to be nearing an end. Whether it's legacy obligations, like pensions, or a business model that no longer works, supervisors at the Bank of England must be nearing the end of their patience. As that day approaches, the spotlight is going to be focused on how the BoE manages (or oversees the management of) the future of the Co-op’s operations and obligations.
It won’t be easy and it certainly will be messy, but the BoE couldn’t have asked for a better opportunity to practice its relatively new ‘clean-up’ or recovery and resolution skills. The Co-op bank doesn’t carry system-wide risk, its troubles are relatively unique, and they have long been known, all providing much time for the BoE to prepare for action. As good as that sounds, various bond holders will react differently to potentially enforced losses in a clean-up. Many of those investors are retail institutions, without too much sophistication; hedge funds are at the other end of the spectrum. As the clean-up proceeds, there will be a number of interesting and timely decisions to make. Will the Co-op’s operations as a whole, shed of certain non-operating liabilities like pensions, be worth more than a break-up offering retail deposit accounts to one buyer and mortgage loans to another, for example?
The BoE should favour an expeditious clean-up to reduce uncertainty, while the Co-op’s creditors (bondholders) might want more time to limit their losses. But both fast and slow approaches have consequences. Without the Co-op group as a shareholder – a certainty, the name ‘Co-op bank’ isn’t going to stick – will customers start leaving as this and more uncertainty arise? The switching service takes a week. Fewer customers will reduce the attractiveness to a buyer and the value to bondholders who will now see their investment reduced further in value. This may be unavoidable, as any bank thinking of purchasing a piece of the Co-op bank or the whole should certainly want to execute a substantial and thorough due diligence process – after all, due diligence was the cause of the Co-op’s demise in the first place.
Read other pieces by Peter Hahn: