What's going on?
The Co-op Bank, which calls itself “Britain’s leading ethical lender”, has agreed a £700 million rescue package with investors that will allow it to continue operating, after struggling to make money in recent years.
What does this mean?
The saga of the Co-op Bank has been playing out for years. Back in 2013, the loss-making bank received £1.5 billion of funding from The Co-op Group (which also owns grocery stores, funeral parlors and other companies) and investment funds to keep it going. At the time, it was viewed as a “win” because the UK government wasn’t forced to bail out the bank.
However, the bank has continued to lose money in recent years. Now, certain investors that have lent the bank money will own a proportion of the bank in the form of shares (in exchange for not being paid back in cash). The Co-op Bank will also raise new money from investors by selling new shares in itself. Meanwhile, existing shareholders, including the Co-op Group, will have their ownership greatly reduced.
Why should I care?
For you personally: There’s a big difference between depositing money in a bank and buying its bonds.
Both are forms of lending and both pay out interest. But the interest on the “bond” is higher than interest on deposits for a very good reason: it’s possible that people owning the bonds will not get paid back in full, which is exactly the case here (individual bondholders will receive less than 50% of their money back; depositors are unaffected). Yet bonds are often subtly marketed as deposit-like savings accounts, even though they are not – something to be aware of!
The bigger picture: A number of small banks have failed recently – and the system has coped just fine.
Three weeks ago, Spain’s Banco Popular faced bankruptcy and was absorbed by Santander. Last weekend, two mid-sized Italian banks were (partly) bailed out by the Italian government. And now a UK bank is going through a similar process. All three scenarios have been resolved without fears spreading that other banks could be at risk (at least, so far!), which is a sign that those respective banking systems are much healthier than they were just a few years ago.