Bailey, also deputy governor of the Bank of England, made the claims at a Treasury Select Committee hearing about the collapse of Co-op Bank’s purchase of Lloyds Banking Group assets under Project Verde.
He said Co-op’s difficulties had all stemmed from its merger with Britannia Building Society in January 2009 with officials at the latter ‘completely convinced of the rightness of their business model’ despite large numbers of poor quality loans.
Bailey said a number of building societies like Britannia and Dunfermline had moved too far away from their traditional base in search of higher returns and this had caused their downfall.
“The common feature of those societies was that they had expanded their lending activities outside the traditional prime mortgage market that building societies occupied,” he said.
“Why had they done that? I think the reason they had done that – and this is a theme that runs through a number of the failures – is that, during the period of five to seven years prior to 2007, lending margins in the mortgage market had been squeezed very heavily.”
He said this was the ‘root cause’ of the Project Verde failure along with the Co-op’s ‘extremely small’ balance sheet before the merger.
“They were either going into what you might call the fringes of mortgage lending, so into the self-certification, non-conforming market, or they were going into commercial property lending,” he added.
“The same is also somewhat true of the HBOS story. HBOS moved out of their traditional prime mortgage lending market because the returns on it were being squeezed and, disastrously, moved into other lending markets that they did not have the skills to manage.”
