Co-op agrees £1.5bn rescue deal for banking arm

The Co-operative Group today unveiled a deal with regulators that will see the mutual plug a £1.5 billion shortfall in the balance sheet of its banking arm.

No taxpayers’ money will be involved in the plan, which will address the shortfall identified by the Prudential Regulation Authority (PRA), the new City watchdog, through a process where bonds are converted into shares.

The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through a merger with the Britannia building society in 2009.

Under the plans, at least £1bn will be generated this year by issuing new shares in the bank and the sale of its general insurance arm, with a further £500 million being raised next year.

Group chief executive Euan Sutherland said: “The Co-operative Group, which clearly regards the bank as a core part of the group, is providing extra capital. Investors in the bank’s subordinated capital securities are also being asked to support the bank at this crucial time by participating in a wider exchange offer.

“This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank. The bank itself has outlined a series of self-help measures that underpin a more targeted strategy for a responsible, community bank focused on its retail and SME customers.”

A spokesman for the Bank of England said: “We will hold the Co-operative to the delivery of its plans. In relation to the Co-operative Bank, this action will deliver the Financial Policy Committee’s recommendation to the PRA in March regarding the capital position of the banking system.

“The PRA will publish details on 20 June setting out the final conclusions of its capital exercise for all of the eight major UK banks and building societies.”