Independent Review of Co-operative Bank Supervision

Background

On 6 March 2018, the Economic Secretary to the Treasury, John Glen MP, announced an independent review into the prudential supervision of the Co-operative Bank between 2008 and 2013.

The independent review considers the supervision of the bank during a significant period for the firm, including its withdrawal from the bidding process to purchase 632 bank branches from Lloyds Banking Group in 2013, to understand what lessons can be learned. 

Also on 6 March 2018, the Economic Secretary to the Treasury approved the Prudential Regulation Authority’s appointment of Mark Zelmer to carry out the Independent review.

Latest updates

1 September 2023: The PRA expects to provide a further update on the actions it has taken to strengthen its approach to prudential supervision in its 2023/24 Annual Report.

27 March 2019: HM Treasury published the ‘Independent review of the prudential supervision of The Co-operative Bank Plc’, which includes eight recommendations addressed to both the PRA and the Bank. In response, we published a news release and ‘The PRA and Bank's response to the Independent Review of the Co-operative Bank’ which sets out our initial response to the recommendations. 

12 June 2018: We published a letter from Norval Bryson, the Senior Responsible Officer for the investigation on behalf of the PRA, providing a brief initial update to the Economic Secretary to the Treasury.

Letter to Economic Secretary to the Treasury

Summary of review findings

On 27 March 2019, HM Treasury published the ‘Independent review of the prudential supervision of The Co-operative Bank Plc’ which includes eight recommendations addressed to both the PRA and the Bank. In response, we published ‘The PRA and Bank's response to the Independent Review of the Co-operative Bank’ which sets out our initial response to the recommendations. The key findings from the report are outlined below:

• The FSA’s stress tests carried out at the time of the Co-op Bank/Britannia merger produced results that were broadly consistent with those of later exercises. The stress tests identified the vulnerabilities in the combined entity’s loan book and showed significant credit impairments in stress conditions.
• The Reviewer concluded that, in hindsight, supervisors focused mainly on longer term chronic issues at the Co-op Bank rather than the more pressing acute ones. Consequently, supervisors and their managers missed opportunities to confront the bank’s weak capital position more promptly. 
• The Co-op Bank and Britannia merger was mainly approved to contain the potential loss of confidence in the building society sector, had Britannia failed.  Although balance sheet vulnerabilities were identified, there should have been a greater and earlier focus on the quality of the loan book and capital cover. 
• There is evidence that the FSA was aware of the Co-op Bank’s change in accounting treatment for its IT investment, but not attuned to the economic substance of it, which was the more relevant consideration for capital. 
• The Reviewer found that the FSA acted reasonably in not intervening to halt Co-op Bank’s bid to buy Lloyds branches and that there was a reasonably clear line between HMT and the FSA with no evidence of any encroachment on the regulator’s responsibilities.

Direction to the Prudential Regulation Authority

A detailed Direction initiating the review and setting out its scope and parameters was laid before Parliament by the Treasury on 6 March 2018.

Direction to the Prudential Regulation Authority from HM Treasury

Review protocol

A Protocol setting out the procedures under which the investigation is to be carried out and underlining the independent nature of the review was published on 12 June 2018. This was amended on 25 July 2018 to clarify how transcripts of meetings held by the Independent Reviewer will be handled (paragraph 18) and HM Treasury’s approach to the provision of legally privileged documents (paragraph 23). 

Protocol

Mark Zelmer biography

Mr Zelmer has over 30 years’ experience in financial services regulation and policy. He is a former Deputy Superintendent of the Office of Superintendent of Financial Institutions, Canada, and previously a senior official at the Bank of Canada, International Monetary Fund, and representative on the Basel Committee on Banking Supervision and Financial Stability Board.