Chief executive of Co-op Bank might not pass “stress test”
Niall Booker, chief executive of the Co-op Bank has said that it would come as “no surprise” if the bank failed its Bank of England stress test later this month.
The stress test on eight banks will be published on 16 December, and the Co-op Bank has already confirmed that is has insufficient capital to cope with the worst of economic shocks.
However, the banks also reported that is was in a much stronger position than a year ago. Niall Booker commented that:
“Given the disclosures to the market in August, it will come as no surprise if the Bank does not meet the desired capital ratios in the stress tests due to be announced in December.
“Almost 70% of our customer assets are residential mortgages and it has always been clear to ourselves and the regulator that we are vulnerable to these tests at this point in our turnaround.”
“There is of course more to do through the course of our plan but we have begun reinvesting in our brand and re-engaging with our customers on the values and ethics that we share with them and that continue to make us different. We have always been open about the task ahead but the progress made to date is good news for our customers, colleagues and shareholders alike.”
The bank had to be rescued in 2013 after a £1.5 billion gap was determined in its balance sheet after the collapse of the bank’s attempt to buy up 631 Lloyds Bank branches.
A group of private investors, principally made up of hedge funds, took a majority stake in the business after injecting funds into the bank. The former parent company, The Co-operative Group, lost control of the lender, though the mutual does retain a 20% stake in operations.
As of last year, the Co-op Bank has added £1.9 billion of extra capital to its balance sheet.
With their H1 results for 2014, the Co-op Bank claimed that it did not have sufficient funds to prevent a “one in 25” stress scenario: a measure of the kind of financial crisis that, according to the balance of probabilities, may well occur every 25 years. These stress tests have been designed in order to assess eight banks’ capacity to withstand a hypothetical 35% crash in house prices, with accompanying rises in unemployment and interest rates.
These recent tests are based on the banks’ balance sheets to the end of 2013.
Niall Booker added:
“The stress tests were undertaken at the end of last year and in 2014 we have already made significant strides through capital raising and, as we stated at half year, are ahead of schedule in the disposal and run down of non-core assets.”
Words: Peter Cribley