The £1.5bn regulatory hole in the Co-operative Bank's capital, which has dogged the institution since the spring, could finally be resolved with a deal that could see the curious sight of a resolutely mutual, even socialist, institution ending up with a stock market listing. This could mean that the bank's estimated 5,000-plus retail investors who hold its popular permanent interest-bearing shares (Pibs) and preference shares will have to swap their debt, with its generous coupons, for equity in the bank. So far, so depressing, but the unanswered question is whether such a method of sparing the taxpayer is any use when it comes to propping up much larger institutions.
Pibs holders will justly feel hard done by, particularly as the bank has never come close to a liquidity problem that might have threatened its existence. The problem for them, and the Co-op, is that without any shareholders the options for raising new capital to meet regulatory requirements were limited. Bondholders will be asked to voluntarily sign up to a "liability management exercise" that will oversee the conversion of debt to equity. So far, there hasn't been talk of coercing bondholders into the scheme, but the bank has made it clear that the coupons on junior debt will not be paid unless there is permission from the regulator. According to analysts, this is unlikely to be forthcoming while the group's core tier-one capital is below the 10 per cent threshold.
On a much broader point, it is unclear whether the Co-op intervention sets a precedent for the orderly recapitalisation of other banks that get themselves into difficulties. The mutual society sector has specific features, particularly the lack of access to fresh capital, that puts retail investors at risk. On the other hand, it is inherently easier to force a restructuring of debt along these lines for building societies than it is with the high-street banks. For instance, the size of the £1.5bn bail-in is tiny compared with the sums that were needed to rescue Royal Bank of Scotland and Lloyds, which suffered a liquidity problem in the money markets linked to their basic undercapitalisation.
