What the Co-op Bank downgrade means to you

The Co-op Bank has been downgraded by financial ratings agency Moody’s this week and could require taxpayer support to stay afloat.

The banking arm of the business is in trouble and the ratings agency has warned the bank could need “external support” to recover.

This news comes after the banking group failed to buy 630 branches from Lloyds Banking Group last month.

Shortly after the Moody's announcement was made chief executive Barry Tootell resigned.

[Related link: Co-op Bank could need taxpayer support, says Moody's]

Moody’s downgrade

The agency has downgraded Co-op as it thinks the bank is no longer protected against potential financial losses.

In a report Moody’s said the bank faces the risk of further substantial losses and references the recent failed acquisition of branches from Lloyds. It said the bank had been slow to react to the merger and has now diminished its ability to fill the current funding gap.

Earlier predictions of financial growth, which mainly stem from 2009 when the bank acquired Britannia Building Society, have not come to fruition. This acquisition was poorly underestimated, according to Moody’s, and the bank is now suffering for it.

“External support”

The Co-op's debt rating has now been moved to "junk" status and it's in dire need of strengthening its balance sheet.

Moody's has suggested the bank could need external support if it's not able to get back on track. But although there has been no mention about exactly where the support would come from, it could be met by the taxpayer, as was the case of NatWest and RBS,.

The exact amount of debt is not known but in March the bank reported annual losses of £674 million.

The Co-op's response

The Co-op has said it is disappointed with the downgrade. It acknowledged the need to strengthen its financial position in light of the broader economic downturn and the impending banking regulations and said it has a clear plan to do this.

The bank also highlighted a recent sale to Royal London of its life business and its intention to sell off its general insurance business. It also said it intends to significantly simplify the business to improve effectiveness and increase its capital position.

“The actions we will now take to strengthen our balance sheet and simplify our business model around a core relationship banking offer, will create a compelling co-operative banking business which is truly distinctive within the banking sector,” a statement said.

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What does this mean for customers?

If taxpayer money is used to fill the gap the bank will be able to reclaim its losses but this decision is not likely to go down well with us, the taxpayers. In an already unbalanced economic climate, finding the money to fund a failing bank will not be a priority for the government, nor will it attract much public support.

The 40% state-owned RBS has received much criticism in the past few years, especially for the size of its bankers' bonuses, and so paying out more money to support the financial industry will not be a decision the government can take lightly.

Customers with less than £85,000 deposited at the Co-op and/or smile and/or Britannia are covered by the UK Financial Services Compensation Scheme, which protects deposits even if a bank goes under.

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