Carney mulls plans to put Co-op bank out of misery

The Bank of England is considering a further intervention into the Co-operative Bank that could lead to the lender being wound up before the end of the year.

John Worth, the finance director of the loss-making bank, warned investors in a brief statement last Thursday that it was set to fall short of the capital targets it had agreed with the regulator.

The bank’s executive team is now scrambling to submit a new restructuring plan to the Bank of England to buy more time. However, the repayment of a £400m bond due this September could complicate matters, City sources said.

The Co-op bank has sufficient cash to repay the bond but will struggle to raise a new bond to replenish its finances. It would be forced to pay an extraordinarily high interest rate, crippling its ability to make profits.

Rather than let the bank make the debt repayment and then struggle to find new capital, the Bank of England’s Prudential Regulation Authority may choose to find an alternative solution.

Market fears that the bond may not be repaid are already reflected in the price. Some of the bank’s junior bonds have been marked down as low as 78p in the pound.

The Co-op bank, which is now 80%-owned by hedge funds, has been struggling to recover after a string of losses stemming from its calamitous takeover of Britannia building society in 2009. The bank has also had to contend with a scandal involving its former chairman Paul Flowers — the “crystal Methodist” who was secretly filmed in 2013 buying class-A drugs.

The bank’s recovery plan depended on a widely held assumption that interest rates would have started to rise by now, boosting the bank’s profitability. Instead, the Bank of England slashed interest rates to 0.25% last summer in response to Britain’s vote to leave the EU.

A wind-down of the lender would wipe out bonds and mark the first rescue of a high street bank since Royal Bank of Scotland and HBOS were nationalised in 2008.

It would also mark the first test case for the Bank of England’s new rescue powers, which were introduced in the aftermath of the financial crisis.

Under the so-called bail-in rules, bondholders must be wiped out to allow a taxpayer-backed rescue. Deposits of up to £75,000 would be safeguarded, however, under the Financial Services Compensation Scheme.

Bosses of rival lenders say they are watching the Co-op bank closely. One chief executive is preparing to make an offer on the bank’s savings and loans following a restructuring.

One of the bank’s largest shareholders said he did not expect the troubled lender to be around in its current form for much longer.

The Bank of England and the Co-op bank declined to comment last night.