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Co-op Bank Boss Quits After Debt Rating Downgrade

Paul Thomas | Bloomberg via Getty Images

The head of the Co-operative Bank stepped down on Friday, after agency Moody's downgraded its debt ratings and said the bank might have to ask the government for money to bolster its capital.

Speculation about the bank's weak capital position has grown since it pulled out of a deal to buy 630 branches from Lloyds Banking Group last month.

Britain's financial regulator said in March that UK banks must raise 25 billion pounds ($39 billion) of extra capital by the end of the year to absorb any future losses on loans.

Industry sources have told Reuters that the Co-op's shortfall could be in the region of 700 million pounds ($1.1 billion) to 750 million pounds.

(Read More: Moody's: Bond Market Bubble Fears 'Overstated')

The bank is part of Co-op Group [CWSGR.UL], Britain's biggest mutual business which is owned by individuals and includes supermarkets, funeral services and pharmacies.

Moody's lowered the deposit and senior debt ratings of the bank and placed it under review for further downgrades late on Thursday.

The agency said the bank faced the risk of substantial losses in its non-core portfolio, loans the bank has identified as risky, and the low level of funds it had set aside to deal with them left it vulnerable to losses.

"Together, these imply a risk of writedowns on junior debt instruments and, potentially, the need for external support to maintain regulatory capital levels," Moody's said.

Moody's said most of the risk stems from loans Co-op took on via its acquisition of the Britannia Building Society in 2009.

In response, Co-op said it would drive through plans to improve its capital position in the coming months.

The Co-op said in March that it would sell its general insurance arm to bolster its finances. Analysts have said that business could fetch as much as 600 million pounds.

It has also agreed to sell its life insurance business to Royal London Mutual Insurance for 220 million pounds.

The Co-op said Barry Tootell would step down as chief executive of its bank. Rod Bulmer, who has held a number of senior positions at the bank, would step into the role until a permanent replacement is found.

A source familiar with the situation said Tootell had planned to leave following the collapse of the Lloyds deal, but the Moody's downgrade accelerated the process.

Britain's financial regulator declined to comment on the Co-op's capital position and Treasury officials could not be immediately reached for comment.

Co-op Bank made an operating loss of 281 million pounds last year and a statutory, or reported loss, of 674 million pounds, hit by bad loans.

Euan Sutherland, a former executive at home improvement retailer Kingfisher, took over as chief executive of the overall Co-op Group this month and faces a big task in turning its fortunes around.

The group reported a fall in underlying profit in 2012, reflecting as the economic downturn and intense competition from rival supermarkets.

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