The Co-operative Bank: questions for George Osborne

The sensational news that the Co-operative Bank’s debt has been downgraded to junk status by Moody’s, the credit rating agency, calls into question the effectiveness of the new financial regulatory system.

The Coalition Government took over almost exactly three years ago on 11 May 2010. One month later the Chancellor of the Exchequer, George Osborne, was berating Gordon Brown for creating a collapsing banking system. He would fix it by the introduction of greater powers for the Bank of England. He placed great importance on the role to be played by the then head of the Financial Services Authority (“FSA”) Hector Sants who had been in place since 2007. The revised arrangements would be operational by 2012.

Mr. Sants was knighted in the New Year’s Honours List 2013 and moved to a lucrative job with Barclays Bank. This followed the trend of the FSA training people in regulatory skills so that they could gain highly paid positions in the financial services industry. Mr. Osborne’s words set in motion a move to the imposition of some of the most draconian regulatory rules that have bought some parts of the sector to an almost complete halt.

The key question, however, is the one that examines whether the new system is achieving its objectives. The Co-operative Bank is, according to the website, regulated by the Financial Conduct Authority (“FCA”) the successor to the FSA.

Until recently the Co-operative Bank was negotiating to purchase 632 branches from Lloyds Banking Group. Last month it announced it was pulling out of the deal. Despite the fact that the bank lost £674m in 2012 it currently has £3 billion of liquid cash.

Yet Moody’s have said that the downgrading was because of huge losses on its commercial property loans as a result of its acquisition of Britannia Building Society in 2009. There is surely no way that the bank has made further poor lending decisions since the recession hit in 2008.

We are told that the bank is submitting a rescue plan to the Bank of England.

Enterprise Britain has long argued that the central problem to the UK’s regulatory problems is that regulators are masters of hindsight judgement and almost totally ineffective at proactive and daily control which is best achieved by working with those who are being regulated.

In 2011 we argued fiercely that there were major problems at PLUS Markets. We could see them and we offered solutions. Two years later the purchaser of PLUS Markets, ICAP (not without its own challenges), are effectively closing the market down to smaller-equity trading and damaging the UK’s reputation in the process.

Why has it taken a Moody’s downgrading to make public problems at one of Britain’s banks? Is this a clear sign that the regulatory system is a long way from being fixed?

There are questions for the Bank of England and the FCA to answer.

Will the Chancellor ask them?

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