Greg Wright: Setback for Co-op, setback for competition between banks

In mid-April, the Co-operative was all set to buy 632 Lloyds branches; a move that would have made Britain’s troubled banking sector more competitive. A new force was about to arrive. Alas! The Co-op has spent the last month recoiling under a series of unexpected blows.

On April 24, the Co-op announced that it was pulling out of the Lloyds deal. It blamed toughening regulations and the worsening outlook for UK economic growth.

Consumer groups were dismayed. In the words of Michael Ossei, an analyst at uSwitch.com: “The purchase by the Co-op would have shaken up the high street and really given traditional banks a run for their money.”

Worse was to follow. Last week, the Co-operative Bank revealed that it was stopping lending to new corporate customers as it seeks to repair a hole in its finances, which is very bad news for small businesses. The move came after credit ratings agency Moody’s downgraded the Co-op to junk status, which forced it to issue a statement, saying that it did not need to be rescued by the taxpayer.

The bank is seeking to rebuild its capital strength, amid reports that it is facing a £1bn shortfall.

The Co-operative has stopped its lending to new corporate customers for the rest of 2013. Loans for existing business clients will be considered on a “case-by-case basis”.

The Co-op has 100,000 small and medium enterprise (SME) customers, including a large number based in Yorkshire.

The bank has begun the tricky task of trying to shore up its finances by disposing of assets such as its life and general insurance businesses.

But how did it get into such a mess?

The bank has been pulled down by its 2009 rescue of Britannia, which was then Britain’s second-biggest building society. It inherited toxic commercial property and home loans that dragged it to losses of £662m in 2012.

The bank’s new chief executive –Niall Booker – who was appointed yesterday, will have plenty to keep him occupied. We must all hope that the banking veteran, who joins from HSBC, can turn the Co-operative Bank around, because we desperately need more competition in the financial services sector.

The fact that the Co-operative Bank is member-owned ought to be a source of strength during times of adversity.

Yesterday, Euan Sutherland, the new group chief executive of The Co-operative Group, said he believed the Co-operative Bank had a “strong future”.

Let’s hope he’s right. The real losers from the collapsed deal with Lloyds were British consumers.

Which? executive director Richard Lloyd said the Co-op’s decision to abandon the Lloyds deal was a setback to the Government’s efforts to tackle the “unhealthy” dominance of the big banks.

As Mr Lloyds said: “This would have given more choice to consumers who are sick and tired of shoddy service and unfair fees and (it would have) put more pressure on the big banks to work for customers, not bankers.”

Regular readers of this column will be familiar with the mis-selling scandals involving small businesses, the life-blood of our economy.

We should all be furious about the economic consequences of the mis-selling of interest rate swap agreements – or IRSAs.

The Federation of Small Businesses has claimed that the scandal could cost 80,000 jobs.

Would these scandals be less common if there was more competition?

You would hope so, although we also need regulators with real bite.

The banks themselves need to re-define their business model, and re-connect with grassroots corporate customers.

Earlier this month I attended an event in Huby, North Yorkshire, which acted as a showcase for the ‘challenger’ banks and alternative lenders.

I chatted to Dave Jones, a partner with Leeds-based Reward Capital, who spent 20 years in banking before moving into the asset-based lending market.

He told me: “The banks need to push authority back down the line again.

“Far too often, we hear about the local guys, who are happy to support businesses, but the guys sitting in the ‘ivory towers’ won’t do it.”

Many companies state that an inability to access finance is the biggest factor holding them back. It’s stopping the UK economy from growing.

The Co-operative Bank’s announcement last week will have made matters worse.

If Mr Booker can revive the bank – and re-start its lending to new corporate clients – we will all be grateful.