Co-operative Bank faces bailout possibility

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It was supposed to be the bright alternative to the High Street banks, with an ethical investment policy. Instead the Co-operative Bank could be Britain's next big financial disaster. It has warned that it could face the possibility of the same sort of bail-out that was required to rescue Northern Rock.

The Co-op reported a £709 million loss but the main problem concerns the need for bondholders to back a £1.5 billion restructuring plan. Without new capital, Richard Pym, the bank chairman, admitted that the banking division could face going into administration.

The fall in the bank's fortunes has been precipitous. At the start of the year it was planning an expanded High Street presence by taking over 632 Lloyd's branches. Instead the banking regulator insisted that it plug the gaps in its capitalisation.

The problem was caused by previously undisclosed bad loans. Many of them were inherited from the Britannia building society which the Co-op took over in 2009. The Britannia had a book full of bad corporate loans which have caused substantial damage to the Co-op's stability.

Chief executive Euan Sutherland admitted it was either fill the £1.5bn shortfall in the bank's reserves or turn to the government with cap in hand. In the meantime, restructuring the company will involve substantial job losses. "It's inevitable in a restructuring of this size that there will be some jobs at risk," he said, before admitting that executives would receive bonuses next year despite the crisis.

Co-op bondholders are alarmed by the development, with particular concern coming from the relatively successful retail division. It's apparent that the bank is causing serious damage to the brand integrity. The notion of the Co-op as a principled, ethical alternative to mainstream banking now looks laughable. Instead it is just another ailing, mismanaged financial institution still addicted to the bonus culture.

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