Coalition ‘encouraged’ Co-op Bank to expand in run-up to failure

The former chairman of the Co-operative Bank has given stark evidence of political interference in a series of deals and attempted takeovers that contributed to the Co-op’s failure and £1.5bn rescue restructuring.

Paul Flowers, a Methodist minister, who was replaced as the Co-op bank’s chairman in the summer, shocked MPs by admitting he did not know how much the bank lent. Rev Flowers also told the Treasury select committee the Co-op’s total assets were about £3bn, when they are actually £47bn, prompting suggestions he was not a “fit and proper” person to have chaired the bank.

But in a brutal two-and-a-half hour session, during which several MPs made little secret of their contempt for the banker-cum-man-of-the-cloth, many seized on Rev Flowers’ evidence that there had been repeated interference from government politicians in a succession of planned mergers or acquisitions.

The government has been desperate to boost competition in high-street banking and has long been suspected of having interfered in the Co-op’s attempted purchase of a portion of Lloyds Banking Group, now spun off as the semi-independent TSB.

Rev Flowers said politicians had “encouraged” and “willed on” the expansionary drive that ended in the rescue of the bank by its bondholders and the parent Co-op group. Yet he refused to accept that the bank had collapsed, even though it had to be bailed out by investors after a £1.5bn capital shortfall was discovered.

He denied that he was contradicting evidence from Peter Marks, the former chief executive of the group, who told the committee that he was not aware of any political interference.

“There was no pressure,” Rev Flowers said. However, in “many, many telephone conversations and meetings”, Mark Hoban, Conservative Treasury minister, “encouraged” the proposed Verde deal to buy branches from Lloyds Banking Group, which was abandoned.

Vince Cable, business minister, also regularly called to offer encouragement.

In the most eye-catching revelation Rev Flowers said Owen Paterson, then Northern Ireland secretary, had summoned him to his hotel bedroom at the Conservative conference in 2010 and asked the Co-op to rescue Presbyterian Mutual Society, the province’s failing industrial and provident society. The bank declined, and the government was forced to lend it £200m.

In further evidence of Rev Flowers’ tenuous grasp of the Co-op’s financial position, the former chairman gave the committee an incorrect figure for its core tier one capital ratio, a crucial measure of solvency. He told the Treasury select committee that it had £3bn in assets when it has £47bn.

Rev Flowers admitted his banking knowledge, picked up in a four-year career before he joined the church full-time, was “out of date”.

Andrew Tyrie MP, committee chairman, said afterwards: “Today we were provided with further evidence, if it were needed, that the chairman of a bank must have a good deal of financial experience and expertise.”

Rev Flowers disputed evidence from Neville Richardson, the former Britannia chief executive who ran the Co-op Bank until he resigned in 2011. Mr Richardson said he left because he opposed the Lloyds deal, but Rev Flowers said it was because he could not be “top dog” at the Co-operative. “He didn’t want to work for somebody else. He always wanted to be his own boss.”

He had discovered this over a half bottle of white wine shared with Mr Richardson in a Shanghai hotel room, he said.

He dismissed criticism by some MPs of the work of KPMG, which has audited the mutual for more than 30 years. Asked by Brooks Newmark, the Basildon MP, whether their due diligence on Britannia had “let down” the Co-op, Rev Flowers said it was correct at the time. “The loan book deteriorated as the economy deteriorated.”

The Big Four firm said it had only a “limited” role in the 2009 merger. “We did limited due diligence and nothing on the corporate loan book,” KPMG said. “KPMG’s audits of Co-op Bank and Co-op Group have been robust and followed all relevant professional standards.”

It won the tender for the contract in 2011 and said it had warned about the bank’s capital position in financial statements in 2012 and 2013.

The Co-operative said it could not comment. The role of all advisers will be examined as part of Sir Christopher Kelly’s inquiry into the bank’s troubles, which reports in May.

Asked whether he was a “fit and proper person” to run a bank, Rev Flowers said his June resignation showed that he was. The FSA had approved his appointment and his strength was corporate governance. He had reduced the bank board’s size from 20 to 12, appointing six members with banking experience.

Huge losses on loans, many inherited from its merger with Britannia building society in 2009, and tightening capital rules, forced the bank to impose losses on bondholders. The Co-op group’s majority stake in the bank was also ceded to private investors including US hedge funds.

Additional reporting by Patrick Jenkins

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