Co-operative Bank Announces Financial Rescue Plan

The Co-operative Bank in Britain said on Monday that it was planning to increase its capital cushion by £1.5 billion ($2.4 billion, 1.8 billion euros) to secure its future but without resorting to state aid.

The bank, which as a mutual is owned by its 4.7 million customers, said it would raise the new capital by issuing shares and bonds in exchange for existing debt, as well as from selling assets.

This followed a review of its health by Britain's financial regulator that forms part of the Bank of England.

The Co-operative Bank said in a statement that it hoped to raise £1.0 billion this year and the remainder in 2014, while the recapitalization plan will see a minority part of the lender listed on the stock market.

It added that the action plan was expected to lead to The Co-operative Bank having a core tier one capital ratio -- or key indicator of the bank's ability to cushion itself against the risk of future losses -- of above 9.0 percent by the end of this year.

That target for banks has been set by the European Union's banking regulator.

"We have put in place a detailed and comprehensive solution to meet the current and longer-term capital requirements of the bank. In doing so we have agreed a plan to ensure its future," said Euan Sutherland, chief executive of The Co-operative Group, the bank's parent, whose other operations include funeral services and supermarkets.

Problems at its banking arm emerged after Britain's part-nationalized Lloyds Banking Group had in April revealed that a deal to sell 632 branches at a loss to The Co-operative Group had collapsed.

-- "Credible plan" --

The planned sale agreed last year had been worth an initial £350 million, rising to a potential £750 million but the deal's collapse led to the exit of The Co-operative Bank's chief executive Barry Tootell.

New chief executive Niall Booker said in Monday's statement: "Whilst we recognize that the short-term outlook is challenging, the measures we are announcing today mean we now have a credible plan for addressing the capital shortfall we face and can turn our attention to managing our non-core assets down and restructuring our core bank.

"In doing the latter, I will be working closely with the strong team of people within the bank to ensure that we are focused on delivering a profitable business, driven by our commitment to core relationship banking and providing our loyal customers with fairly priced products and high-quality service," he added.

The Bank of England said that The Co-operative Bank would be held to its recapitalization plans set out after a review by the Prudential Regulation Authority.

"The PRA's current assessment is that the Co-operative Bank needs to generate an additional £1.5 billion in common equity tier one capital in order to absorb potential losses over coming years," said a spokesperson for the central bank. "We will hold the Co-operative to the delivery of its plans."

Moody's had last month slashed its rating on The Co-operative Bank by six notches to junk status. However, The Co-operative on Monday said it expected its "tier one ratio to be above nine percent by the end of 2013, and to increase further in the following years".

EU Supervisor, the European Banking Authority, requires core capital to amount to 9.0 percent of the risks being carried by a bank based within the region, subject to a weighting of each category of risk.

This is higher than international rules created in response to the 2008 global financial crisis, known as Basel Three, which require 7.0 percent. Previously, on a different basis, banks had to have a capital ratio of about 5.0 percent.