Tony Greenham writes:
The Co-operative Group has announced that owners
of bonds in its banking subsidiary will be forced to swap them for newly issued
shares traded on the stock exchange, taking a substantial loss in
the process.
This will enable the bank to raise most of the £1.5bn shortfall in
capital that it has agreed with the regulators, the Prudential
Regulatory Authority.
Those who bank with the Co-op should not be too
concerned it will now have to dance to the tune of the stock market. The bank
will still be majority owned by the Co-op Group.
It is hard to imagine why it
would risk damaging its successful strategy of offering a distinctive ethical
choice for customers, jettisoning its identity because of a change in the
status of a group of remote investors.
There are examples of so-called semi
co-operatives in other countries, notably Italy and France, but the private
shareholders generally have no voting rights and do not expect to chase high
short-term financial returns. They know their place.
More concerning is what
the announcement means for banking in the UK. Expect to hear two conclusions
drawn, both of which are wrong. First, that the successful bail-in of
bondholders means we no longer need to worry about bank bailouts. Second, that
the Co-op bank's difficulties prove the superiority of the private sector over
mutuals.
The latter point, in particular, deserves short
shrift. If the dodgy loans taken over from Britannia prove that co-operatives
should not be in banking, then surely the calamitous failures of Lehman
Brothers, Bear Stearns, RBS, Lloyds and Northern Rock all prove that there is
nothing more dangerous than a shareholder-owned bank aggressively pursuing
expansion and profits at all costs.
In fact, co-operative banks are thriving all
around the world where, unlike the UK's Co-op bank, they are organised as
networks of local banks that collaborate to achieve financial stability and
economics of scale. They manage this without losing benefits such as strong
small business lending, local ownership and decision making.
The governance and
oversight by members tends to be much stronger than in the UK, preventing
executives with delusions of grandeur from aping their stockmarket peers and
pursuing aggressive expansion strategies. In Europe, co-op banks performed well
during and since the financial crisis are gaining new customers.
The British Co-op is not actually a co-operative
bank; it is a regular commercial bank that is owned by the Co-operative Group.
This has a big impact on how the bank is likely to behave.
It means the Co-op
has no direct local customer ownership or oversight, which is why its managers
seized upon the opportunity to buy Britannia and expand their empire, without
properly considering whether this move was actually in the interests of their
customers.
As for too-big-to-fail, it is good to see
bondholders contributing to the recapitalisation of a bank, as should always
have been the case. However, this might work for a small bank suffering
specific difficulties, but if one of the systemically important global banks
were to suffer problems the shockwaves through the highly connected financial
system would still leave taxpayers in danger of being the last chequebook left
standing. The solution, of course, is to not have institutions that are too big
to fail in the first place.
This brings us back to the question of banking
diversity. The coalition government promised it, but has not delivered. We need
more local and specialist banks. We need more mutuals and public interest
banks, not fewer.
This adds weight to those who want to prevent a politically
motivated and rushed privatisation of RBS. Returning RBS to the private sector
unreformed solves none of the UK's structural banking problems.
The Co-op bank will remain a vital contributor to
customer choice and ethical banking. The real lesson from its problems is that
we are in urgent need of traditional co-operative banking, not national banks
with no local element that are simply owned by a co-operative group.
We know
from many other countries, including Germany, France, Austria, Norway and
Japan, that diverse banking systems are both possible, and vital for economic
stability. Now we just need our politicians to take note.
No comments:
Post a Comment