Just as larger banks in Britain are recovering from the financial crisis, a smaller one championed by lawmakers as an alternative to institutions like Barclays and Royal Bank of Scotland is floundering, complicating the government's plan to shake up the industry and testing its new regulatory system.
Much like the past troubles of its maligned larger rivals, the Co-operative Bank now has too many risky real estate loans and a buffer against losses that is too thin. Moody's Investors Service cut its rating last week by six levels, to junk status, and said the bank might require "external support" if loan losses increased much more. The bank's chief executive, Barry Tootell, resigned the next day.
The developments are an embarrassment for George Osborne, the chancellor of the Exchequer, who made it one of his goals to support the growth of smaller banks to improve the stability of the banking sector and increase competition. The government frowned upon the concentration of the market — the top five banks control 85 percent of personal checking accounts — arguing that more competition would strengthen the sector.
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In a speech in February, Mr. Osborne said he wanted "upstart challengers offering new and better services that shake up the established players." He mentioned the Co-operative Bank by name, saying that Britain had started to make some headway but that he wanted to see "more banks on the high street, so customers have more choice."
In an industry that cost the government billions of pounds to support throughout the financial crisis and that recently shocked clients with a string of scandals, the Co-operative Bank had enjoyed a relatively unscathed reputation.
Its structure also makes it stand out. The bank is the main subsidiary of the Co-operative Group, one of the largest cooperative businesses. It is owned by seven million members, mainly its employees and customers. Apart from the bank, the Co-operative Group also owns funeral services, pharmacies, food stores and farms.