The investigation will examine supervision of the Co-operative Bank during a significant five-year period for the firm, which almost resulted in its complete collapse.
With the Financial Conduct Authority’s (FCA) enforcement investigations into the bank concluded with the banning of Paul Flowers, the government can now begin the promised review process.
Until April 1 2013 the industry was regulated by the Financial Services Authority (FSA). This was subsequently split between the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
The review must consider nine key elements, as outlined by the Treasury’s direction. This includes “assessing the actions, policies and approach of the FSA and the PRA as the institutions with statutory responsibility for the prudential supervision of the Co-op Bank for the period 1st May 2008 to 22nd November 2013”.
Other points the investigation must focus on include:
- whether the FSA could or should have developed more effective arrangements for stress-testing the Co-op Bank’s ability to withstand challenging operating conditions sooner than it did;
- whether the application of more effective stress-testing arrangements would have led to the Co-op Bank’s loan impairments being identified sooner than was in fact the case;
- whether the Co-op Bank’s loan impairment profile, which appeared to differ from that of other banks, should have led the FSA to investigate it more closely before 2012 than was in fact the case;
- why the FSA’s analysis in October 2008 to January 2009 of the suitability of the proposed merger of the Britannia Building Society with the Co-op Bank failed to properly account for the prudential risks attached to Britannia’s assets that were subsequently identified by the PRA;
- whether, in the FSA’s view, the Co-op Bank had sufficiently comprehensive and reliable financial information at its disposal at the time of the proposed merger between the Co-op Bank and Britannia to allow it to make a properly informed decision as to the suitability of the merger in prudential terms.
The period also included Co-op Bank’s withdrawal in 2013 from the bidding process to purchase 632 bank branches from Lloyds Banking Group, known as Project Verde.
Zelmer to lead enquiry
The PRA’s appointment of Mark Zelmer to carry out the independent review has been approved by Economic Secretary to the Treasury John Glen.
Zelmer has more than 30 years’ experience in financial services regulation and policy.
He is a former deputy superintendent of the Office of Superintendent of Financial Institutions in 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.
Glen said: “We are committed to creating a stronger and safer banking system. A vital part of this is ensuring that our regulatory system can learn from past events. The launch of this independent review is a further demonstration of this commitment.”
In response to the review’s launch, the PRA said: “The PRA supports HM Treasury’s decision to launch an independent review of the prudential supervision of the Co-operative Bank over a disruptive period for the firm.
“Since it was established in 2013, the PRA has been committed to learning the lessons of the past and the findings of this review will help the PRA meet its objectives in the future.”