Co-op Bank admits it may not pass financial ‘stress test’

THE chief executive of the Co-op Bank has admitted it would come as “no surprise” if the bank failed a Bank of England stress test later this month.

The results of the stress tests on eight banks, including the Co-op Bank, are due to be published on 16 December. The bank has already admitted it has insufficient capital to cope with the most severe economic shock.

But Co-op Bank head Niall Booker said that, overall, the bank was much stronger than a year ago.

Responding to a newspaper article that the Manchester-based bank would fail the stress tests, Mr Booker said: “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.”

He added: “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.”

Last year, the bank had to be rescued after a £1.5bn black hole was found in its balance sheet following the collapse of its attempt to buy 631 Lloyds Bank branches.

A group of private investors, made up mostly of hedge funds, took a majority stake in the business after they injected funds into the bank. This saw former parent company The Co-operative Group lose control of the lender, although the mutual does retain a 20% stake.

Since last year, the Co-op Bank has added £1.9bn in extra capital to its balance sheet.

When it published its half-year results in August, the Co-op Bank said it did not have sufficient funds to withstand a “one in 25” stress scenario.

This is a measure of the kind of financial crisis that, on the balance of probabilities, might occur once every 25 years. The stress tests have been designed to determined the eight banks’ ability to withstand a theoretical 35% crash in house prices, surging unemployment and interest rates.

They are based on the banks’ balance sheets up to the end of 2013.

Mr 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.”