George Osborne pressed Brussels last year to spare the Co-operative Bank from tougher rules applied to big listed banks, a revelation that complicates Conservative attempts to drag Ed Miliband into the scandal engulfing the bank and its former chairman.
The chancellor’s attempt to win more lenient capital treatment for the Co-op came at a 2am negotiating session between finance ministers in May, shortly after he angrily criticised special carveouts, according to several people present.
His intervention provides further evidence that Tory politicians – as well as Labour – pulled out the stops to help what was seen as a bastion of banking respectability that they hoped could bolster competition in retail banking.
In particular, there was political momentum behind the idea that the Co-op’s bid for Lloyds’ TSB network would produce a strong challenger to the big four high street banks. Though talks on the deal had broken off a month before Mr Osborne’s intervention in Brussels, they resumed two months later. It is unclear whether there was any change to the regulator’s view of the Co-op’s capital situation during that period. The bank subsequently withdrew from the purchase, when it emerged that it had a £1.5bn capital hole.
Mr Osborne’s aides say the chancellor had tried to help the Co-op in Brussels and was not embarrassed about ensuring the bank was treated the same as other EU mutuals. “We are totally unashamed in trying to help a British institution and the British economy,” one said.
A person present at the talks in May spoke of “complete and absolute astonishment” when British officials asked for the Co-op to benefit from lenient terms that Mr Osborne had earlier mocked for breaching the Basel accord on bank capital.
Diplomats involved said the Co-op request came after Mr Osborne realised other countries would not back his call to tighten standards for all banks. The European Commission declined to comment.
The news muddied attempts by David Cameron to draw a direct link between the Labour party and the bank’s unfolding scandal. Revelations at the weekend that the Rev Paul Flowers, former chairman and once a local councillor, had allegedly been caught on film paying £300 for illegal substances have badly damaged the group.
Mr Cameron said the coalition was planning an inquiry– overseen by regulators – into what had gone wrong at the Co-op bank, possible regulatory failures, and the approval of Rev Flowers as the bank’s chairman in 2010 even though he lacked banking expertise.
“This bank, driven into the wall by this chairman, has been giving soft loans to the Labour party, donations to the Labour party, trooped in and out of Downing Street …now we know they knew about his past,” he said.
“Why did they do nothing to bring to the attention of the authorities this man who has broken a bank?”
Andrew Tyrie, who chairs the Treasury select committee, said any review must be led by an “independent person”.
“The authorities cannot be seen to be marking their own work,” he said.
The Co-op’s capital rules will be governed from next year by the EU’s latest capital requirements law, which give latitude to mutually owned banks on the types of instruments that count as top-notch capital.
However, the Co-op’s status as a public limited company wholly owned by a mutual group was a grey area that Mr Osborne’s officials clarified, potentially to the Co-op’s advantage. In its preliminary assessment of EU implementation, the Basel committee questioned whether the way co-operatives were treated was compliant with the accord.
Michael Dugher, co-head of Labour’s elections campaign, said: “The Tories were all over the Co-op like a cheap coat six months ago because they were desperate to try and get some distance between them and all the dodgy hedge funders who bankroll their party.”
In the end, Co-op’s capital advantage is an academic point as the restructuring deal to recapitalise the bank through a debt-for-equity swap will leave the mutual parent with only 30 per cent ownership of the bank. That will bar it unequivocally from qualifying from the capital latitude given to pure mutuals.
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