The Death of the Co-operative Bank: British Banking Takes Another Huge Leap In The Wrong Direction

by George_East on June 19, 2013

The Co-opAn under-reported story of the week (though it did make the front page of the Financial Times) has been the effective end of the Co-operative Bank as a mutual.    The decision to deal with its current financial woes by converting bond holder debt to shares, will, by definition require its conversion into just another bank.

Its current duties are to its members: the ordinary savers and borrowers who use its services.     By the time the financial rescue package has been implemented, its duties, just like those of the other high street banks, will be to its shareholders.  Maximising shareholder value will be its one driving force.   Its directors will owed duties to its shareholders, rather than those who have bank accounts with the bank, and its decision making will be guided towards profit alone.

On one level the Co-Op rescue plan is a good thing, in that it has not looked to the tax payer for a bail out.  Unlike the financial car wreck that was (and are) RBS, Lloyds, Northern Rock, Bradford and Bingley and HBOS, no money from the public purse is being provided to Co-Op for the purposes of its re-capitalisation.  Instead following the Cypriot model (albeit without the indiscriminatory application), the Co-Op is being rescued by way of a bail-in.  Those who will suffer will be those who own Co-Op debt (though not ordinary depositors), whose bonds will be converted into shares.

However, although this aspect may be welcome, this is more than outweighed by the disappearance from British banking of the one proper bank, organised on a different model.    A bank that was born out of and had a significant role to play in the co-operative movement:  that wholly admirable 19 century form of bottom up socialism, that said that people could achieve more by collectively coming together (outside of any state control) to provide goods and services that its members needed.    The retail Co-Op still continues, of course, but no longer will financial services be organised along these lines.

Although, it cannot be said that being run as a co-operative or a mutual means that financial difficulties will not occur (if that were true the Co-Op would not be in the trouble that it is), it is true that the ability to run a financial institution on a basis other than maximisation of share holder value permits a longer term view to be taken and makes such financial difficulties far less likely.  It enabled them to be brave enough to be boring, which is, after all, what most banking should be.

We have seen that with the old building societies.  During the rush to de-mutualisation in the 1980s and 1990s the high street lost virtually all of the old building societies.   Halifax and Birmingham Midshires was absorbed into HBOS which went bust,  Alliance and Leicester and Abbey National was bought by Santander,  Cheltenham and Gloucester was bought by Lloyd TSB and went bust,  Bradford & Bingley and Northern Rock went bust.   None of the big name building societies which de-mutualised survives as an independent business.  Not a single one.

The one big building society from that era which does still survive and indeed prospers, having been relatively unaffected by the financial crisis is the Nationwide.   It was the only one of the big Building Societies which resisted the pressure to demutualise.

The Co-Op’s demise as a mutual (even if its name survives for now) is another example of economic policy making learning none of the lessons of the crisis.  In a desire to avoid putting any public money into the Co-Op, the government has destroyed the only alternative banking model on the high street.

The government should be encouraging the revival of mutual and co-operatives in the banking sector as a way of taking some of the systemic risk out of the system.   Instead we have more of what put where we are now in the first place.

The Co-Op Bank RIP

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