Ismail Erturk, Senior Lecturer in Banking, on the reasons behind the financial losses of the Co-op Bank

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“During the 2008 banking crisis, the Co-op Bank remained a strong, stable bank unlike so many others in the UK. It was in 2009 when problems started to emerge for the Manchester based bank when they merged with the Britannia Building Society.

The merger came at a time when the government wanted banks to merge in order to make them stronger. However at the same time, the Co-op Bank’s management wanted to expand to benefit from the financial crisis, leading to a merger that ultimately created difficulties for the company.

One of the first difficulties came when the bank sold loans they had acquired from Britannia Building Society. As a result, they missed out on the income they would have received by keeping these loans on their balance sheets and made significant losses.

Another reason for the Co-op Bank’s financial losses was their lack of capital. Recently, the Bank of England conducted a ‘stress test’ on the Co-op to determine how the bank would react financially to a slump in the economy. They found that the bank did not have enough capital to deal with losses.

Although the loss did not come as a shock to the banking community, the scale of the loss was higher than expected. The Co-op’s spending habits were not indicative of such losses as the company continued investing in new IT projects.

Both the bank’s failure to deal with the bad Britannia loans and the pressure they received from the Bank of England led to their current situation. Despite these losses, Co-op customers should not be worried as this incident has likely strengthened the bank.”

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About Author

Ismail joined the School in January 1987, having worked previously for a merchant bank in Istanbul. Ismail is a regular commentator in the broadcast and print media. He has taught corporate finance, bank financial management and international finance on both the School’s MBA and Executive Centre programmes. His research interests are in financialisation and financial innovation.

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