Co-operative fails the Bank of England stress test
The Co-operative Bank has failed a Bank of England test to see how lenders would cope with severe economic stress, which also raised concerns about state-backed Lloyds Banking Group and Ulster Bank parent company Royal Bank of Scotland.
The troubled Co-op must cut its loan book by £5.5bn while RBS is to issue £2bn worth of convertible bonds.
The Bank, which is led by Mark Carney, found that a severe downturn with house prices plunging 35% would wipe out the Co-op's capital because of the effect on its risky commercial property and sub-prime home loans.
The test, using the position of banks and building societies at the end of 2013, also found RBS and Lloyds would be susceptible to such a crisis but improvements and changes to their plans this year meant only the Co-op was required to submit a new plan.
The test examined how lenders' balance sheets would stand up to a potential Doomsday scenario of economic crisis by calculating the ratio of capital against loan assets on their balance sheets in such an event.
It judged that Lloyds, 25%-owned by the taxpayer, would fall to a capital ratio of 5% under such a scenario, though by taking severe actions such as cost-cutting this would be 5.3%. It compares with a minimum benchmark set by the Bank of 4.5%.
The group, which includes the Halifax and is heavily exposed to the UK housing market, "remains susceptible to a severe economic downturn", the test found.
But it said that, in light of the measures it already had in train, it did not require Lloyds to submit a revised capital plan.
The results did not comment on whether the test would affect Lloyds' ability to pay a dividend next year, though it assumed that payouts would not be made in the stress scenario.
For RBS, 80% owned by the state, the capital ratio would fall to 4.6% in the stress scenario, or 5.2% after "strategic management actions" which could include cost-cutting.
The Bank said it would ordinarily have required RBS to submit a revised capital plan but, given the progress already made and the capital strengthening actions in its updated plans, this would not be necessary.