Co-operative Bank's £1.5B hole — a merger that destroyed a 140-year-old bank

The Co-operative Bank was founded in 1872 as the loan and deposit department of the Co-operative Wholesale Society, growing into a trusted UK high-street bank owned by the Co-operative Group, the country's largest consumer cooperative. In 2009, the bank merged with Britannia Building Society in a deal that was supposed to create a stronger mutual banking alternative to the big four UK banks. Instead, it inherited a portfolio of toxic commercial real estate loans that would bring it to the brink of collapse.

By March 2013, the bank reported losses of £600 million. In May 2013, Moody's downgraded its credit rating by six notches to junk, and CEO Barry Tootell resigned. On June 17, 2013, negotiations with the Prudential Regulation Authority revealed a capital shortfall of approximately £1.5 billion. The bank announced a 'bail-in' scheme compelling subordinated bondholders — including US hedge funds — to convert their debt into equity, effectively taking control of the bank.

The crisis was compounded by a scandal involving chairman Paul Flowers, who was caught buying crack cocaine and methamphetamine in November 2013. The Co-operative Group's ownership was diluted from 100% to 20% after the bail-in and a £400 million rights issue in 2014. By 2017, the Group had written off its entire stake, selling its final 1% for £5 million. Total losses from the crisis exceeded £2.6 billion. The bank has never recovered its former standing.