The End of Co-operative Banking?

I don’t know if you have seen the Danny Boyle film 127 hours. Even if you haven’t I am sure you will be familiar with the story. It is the story of the terrible accident that befell Aron Ralston who when climbing in south-eastern Utah fell and trapped his arm. Stuck for five and a half days under a dislodged boulder he was forced to amputate his own right forearm with a sort of blunt Swiss army knife.

This may sound melodramatic but this is the way I feel about what has happened to the Co-operative Bank. I feel like someone has cut off one of my arms.

May 9^th 2013 will stay long in the memory for many co-operators. It was the day of reckoning for the Co-operative Bank. It was the day the great unravelling began, the day ratings agency Moody downgraded the Bank's debt rating to "junk" status. It said that that the bank was vulnerable to potential losses and warned that the bank may need "external support" if it could not strengthen its balance sheet.

In a massive piece of understatement the Bank said it was "disappointed" by Moody's decision.

The news preceded the resignation of chief executive, Barry Tootell, and the collapse of the bid to buy 631 branches from Lloyds Banking Group.

This unraveling has now ended with the enemy inside the gates. US Hedge Funds sometimes described as “vulture funds”, Silver Point Capital and Aurelius Capital Management now have significant stakes in the Bank. Presumably intending to do to us what they usually do with the distressed assets of developing economies.

Now Moody’s ever helpful in these matters say that the Bank will be forced to “take the axe” to costs. It is worth pointing out that the issues the Bank faces are not dissimilar to those faced by the rest of the banking sector and that had the collapse of 2008 not happened we would not know be talking about it. Or if the ludicrously low interest rate regime had not been in place ever since that has destroyed the margins in conventional retail banking.

Some Banks have had to be nationalised all have had to be recapitalised. So the environment for banking has certainly worsened dramatically. We also know that some of that crisis in the banking sector has been caused by bankers themselves.  By their ridiculous growth strategies and reckless lending of their taking on of risks and of products that they themselves did not understand in a mad greed driven feeding frenzy.

We had prided ourselves that we where different that the mutual sector or at least what was left of it had weathered the storm better than the joint stock banks. We encouraged people who had an ounce of ethics to “switch their money”.

Now we find according to no less than the ex CEO of the Co-operative Group and even the current chair that there is a crisis of governance at the Group.

I think we need to unpack these comments because governance has several elements to it. Clearly there is the structure of the organisation, is there something inherent in large scale co-operatives that makes them difficult to govern? Was there a healthy culture at the Group ie was there an open and respectful relationship between those who represented the interests of the members and the professional management? And what where the qualities of the key personnel, the senior executives of the Group and the Bank and the lay chair of the Bank and the Co-op Group?

Before we can answer these questions there is a review underway by Sir Christopher Kelly, Chair of the Kings Fund and former chair of the Committee for Standards in Public Life. His job is in looking at the trail of poor decisions that lead us to this situation “to look at the management structure and culture in which those decisions were taken; lines of accountability which governed those decisions; and the processes which led to them” and “To identify lessons which can be learnt to strengthen The Co-operative Bank and the wider Co‑operative Group, and the co-operative business model generally.”

Clearly we should wait until the results of that report which will be available at the Group AGM next May. In the meantime I am full of praise for the way; despite the dreadful hand his has been dealt, Euan Sutherland the current CEO of the Group has handled this situation.  There are nonetheless a few things I think that are now obvious.

Firstly that we should have no confidence in the advice from Group Chair Len Wardle or ex-CEO Peter Marks about what to do next. We should have stopped listening to them a long time ago. And it is inconceivable to me that Len could contemplate staying in the Chair until May he should have already gone.

Secondly a “Co-operative Bank” with a minority member’s stake maybe “ethical” in intent but it is evidently not, in my personal view, a Co-operative. And if it persists in using the name it should be asked to desist just as the brand Co-operative Travel which the Group sold to Thomas Cook has to disappear after a certain period.

Lastly of course I hope this amputation stops the bleeding and it protects the body of the Co-operative Group from any further liabilities.  It is sobering to remember that none of the demutualised building societies have survived the transition.