Britannia loans 'behind Co-op woes'
A top City regulator has insisted the Britannia Building Society's risky loan book was and is a "key factor" in the Co-operative Bank's mounting woes.
Andrew Bailey, chief executive of the Prudential Regulation Authority, wrote to MPs to say a big part of a £1.5 billion black hole in the Co-op's balance sheet stems from the former building society's risky assets.
Mr Bailey's letter to Andrew Tyrie, chair of the Treasury Select Committee, follows evidence from former Britannia boss Neville Richardson earlier this month, when he insisted the building society was a success when it was taken over by the Co-op in 2009.
MPs are probing the collapse of the Co-op's attempt to buy more than 630 branches from Lloyds Banking Group in April, dubbed Project Verde. It later emerged the Co-op Bank needs to find £1.5 billion of capital, which the customer-owned group is attempting to plug by forcing losses onto bondholders.
Mr Bailey said while Britannia is not solely to blame for the bank's problems, the building society's assets are behind more than half the bank's total loan losses of £970 million between 2012 and the end of June 2013. He cited £682 million of losses on impaired non-core loans during the 18 months.
Mr Bailey said more than 75% of the Co-op's non-core loan losses in 2012 and around 85%-90% of non-core loan losses in the first six months of this year relate to Britannia assets.
"The former Britannia assets were those on the bank's balance sheet that were most vulnerable to further stress," he wrote.
"The risk profile of the remaining Britannia assets were, and remain, a key factor in our assessment of the Co-op Bank's current capital position."
The regulator cited high levels of risky self-certification mortgages and a number of large, high loan-to-value corporate loans in the Britannia book .
Mr Bailey also said his letter, dated September 10, is "not intended as a criticism of Neville Richardson".
The Co-op acquired the Britannia - then Britain's second-biggest building society - in spring 2009 to create a "super mutual".
However, Mr Richardson, who headed the Co-op Bank after the Britannia deal, told MPs the building society's assets only accounted for a third of the Co-op's impairments and significant items during the 18-month period.
Mr Tyrie said: "The committee has received apparently conflicting evidence. We will be taking more, both in formal sessions and in writing, to get to the bottom of this.
"The quality of Britannia's loan book is crucial to an understanding of the Co-op's capital position and the collapse of Project Verde."