James Daley

By James Daley

One of the more quirky regulations to drop out of the backside of the financial crisis was a requirement for companies to explicitly list the key risks to their business every time they report their results. It's a rather heavy handed way of ensuring that companies are given every opportunity to get any potential threats out into the open - but these statements do make for fascinating reading, and raise some interesting questions around what exactly constitutes a key risk.

Today's interim results from the Co-op Bank may as well have been penned by Eyeore. They include well over 30 different risks to the business which, when compared to some of their peers, show what a mess the Co-op Bank is still in.

All banks talk about the risk that the regulator or government might move the goalposts. Or that their IT systems might collapse. But Co-op's list of key risks reads like a manifesto for failure. Right at the top, it acknowledges that there's an awful lot of work to do to get the bank back on track - fair enough - only to add that the Bank and its management have no track record of successfully managing significant change on such a scale.

It goes onto highlight that it is still failing to meet the capital guidance set out by the Prudential Regulation Authority, and that it is being investigated by the Financial Conduct Authority for numerous failings in the past, which are likely to result in significant fines. Worse still, it concedes that it doesn't yet have a grip on the culture in its business, and may still be mis-selling as we speak - which would of course lead to even more fines in the future.

Banking squatters

My personal favourite is the admission that the Co-op Bank is effectively squatting in many of its offices:

"The Bank does not have any documented right to occupy several of its principal establishments and places of business. The Bank’s current occupation of some properties owned by the Co-operative Group is in breach of the terms of the lease for that property."

What's strange is that the Co-op makes little effort to put a gloss on its situation. The equivalnent section in Lloyds Banking Group's annual results statement, for example, contains lists of mitigating actions that the bank is taking to minimise each risk that it has identified. So Lloyds is still managing to dispatch its regulatory reporting obligations while also giving confidence to investors that it has a plan for recovery that it believes will work.

The Co-op's weak capital position, and it's reliance on retail deposits, is particularly alarming. A sharp loss of confidence in the Co-op and a continued loss of deposits could be fatal.

Given that 80% of the Bank is now in the hands of private equity owners - and it's mutual ownership and heritage is quickly fading into the past - it's hard to find many reasons to commend the Bank. It's unique selling point is that it abides to a code of ethics that few others do in the sector. But these are not values that it's shareholders hold dear.

It's hard to see any future for the Co-op Bank other than an eventual discounted sale to a competitor and a disappearance of the brand. It will be a loss for the British banking sector - and should weigh heavily on the consciences of the former management who drove a great company into the dirt over the last 15 years.