Who will pay the Co-operative Bank's £400m PPI costs?

There are three options: the Co-operative Group, its new hedge fund overlords, the government. Here's a hint: it's not going to be us...

by Emma Haslett
Last Updated: 10 Apr 2014

It never rains but it pours at the Co-operative. So caught up has its banking arm (of which the Group owns 30%) been in trying to solve its myriad problems, it turns out it didn’t spot that, like almost all the other major banks in the UK, it is going to have to shell out £400m-odd for PPI mis-selling and breaching the Consumer Credit Act.

This is very bad news for the bank: the new discovery is going to push losses for 2013 to somewhere between £1.2bn and £1.3bn, even worse than expected, when the Group delivers its results ‘on or before April 8’ (a month later than originally planned).

As anyone with access to the internet is aware, the past year and a bit have not been kind to the Co-op. There was the £1.5bn capital shortfall it discovered, then there was the whole thing about who should bail the Co-op Bank in/out, then there was the Crystal Methodist and finally, chief executive Euan Sutherland could take it no more and resigned last week.

The big question is who is going to stump up the cash to combat this latest disaster. There are three options:

1. The Co-operative Group. Unlikely – having helped to orchestrate a virtual takeover (‘bail-in’) by hedge funds, it promised to inject £266m and then sort of hoped to be able to take a step back from the running of the bank. ?What’s interesting is that it had originally said it would need to keep a ‘significant stake’ in the bank if the lender still wanted to use ‘Co-operative’ in its title. This morning, though, it said this is only necessary for the short to medium term, and that it has now embedded its ethical values in the bank’s constitution and by establishing a ‘values and ethics committee’ (bit of a joke, under the circumstances). In short, it is positioning the bank to be as independent as possible, just in case…

2. The bank’s new hedge fund overlords. This is the most likely outcome. As part of the bail-in process they’ve already put £1.1bn into the bank, but chances are it’ll have to go back, cap in hand, for the extra £400m – and, however grudgingly, they’ll have to stump up the cash. Customers will argue that the more money hedge funds put in, the more the bank becomes ‘Co-operative’ in nothing but name. But we don’t see many others willing to help it out…

3. The government. Very, very unlikely. The Co-op may be one of the UK’s biggest banks – but is it too big to fail? Doubtful.

To be fair to the bank, it is doing all it can to sort itself out after the string of scandals it has been beset by over the past year. But change is a long, slow process and the hedge funds now overseeing it will have a lot less patience than the Co-operative Group did. We’ll find out more on April 8. Until then, its senior management is presumably hoping this is the last disaster to come their way.

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