The Co-operative Bank rushed to reassure customers today after warnings that it may need a taxpayer bail-out.
The lender issued a statement insisting: “We haven’t sought nor do we need government support.”
But it came as the bank’s boss dramatically quit, just hours after a top ratings agency downgraded its debt status to “junk”.
Moody’s warned the bank needed to strengthen its capital cushion – its ‘rainy day fund’ – to sustain potential losses.
Of particular concern are the commercial loans it inherited when it took over the Britannia Building Society in 2009.
Moody’s said it may need “external” support and said there was “moderate potential for systemic support likely to be forthcoming from the UK authorities”.
Experts believe the bank needs to raise at least £500million to make-up the shortfall.
The Co-op Bank, which has 342 branches and 6.5million customers, has sold itself as an ethical alternative to the big banks.
Many charities and some of the country’s biggest union hold accounts with it as a result.
It is part of a wider group that takes in everything from supermarkets and pharmacists to the largest chain of funeral directors.
But an audacious attempt to more than double in size, through buying 631 branches from Lloyds, recently collapsed.
Group chief executive Peter Marks blamed the state of the economy for squeezing potential profits.
But the failure raised questions about the bank’s finances.
Moody’s announcement to downgrade the bank’s debt to “not prime” came late last night.
Early today, the Co-operative confirmed the bank’s chief executive, Barry Tootell, had resigned.
He has been replaced on an interim basis by Rod Bulmer, who joined the Co-op six years ago from Santander.
The Co-op said it was disappointed by the downgrade, but stressed it had a “clean plan” to bolster its financial strength.
It said: “We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements.
“We do acknowledge, like the rest of our banking sector peers, the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements, and we have a clear plan to drive this forward throughout the coming months.”
The Treasury and Prudential Regulation Authority (PRA) – the UK banking regulator – said they declined to comment on individual banks.
But the PRA is expected this month to tell a number of banks to raise new capital.
It has been in discussions with lenders after the Bank of England’s Financial Policy Committee discovered a combined £25billion shortfall in bank capital reserves.
Regulators are ordering banks to increase their capital cushions to avoid a repeat of the financial crisis, but there are fears these new rules are also impacting on the sector’s ability to lend.
The Co-op, which holds its annual general meeting in Manchester on May 18, recently disclosed that its banking division racked up annual losses of £662million in 2012.
It blamed the big banking loss on loan impairments on non-core operations mainly relating to its 2009 acquisition of Britannia and a further provision of £150 million to cover payment protection mis-selling.
However, its core banking business still saw profits fall to £120million, from £173million a year ago.
Long-standing head Mr Marks, who led the Britannia deal, retires at next week’s AGM.
Asked whether the Government would be prepared to step in to help the Co-op Bank if required, Prime Minister David Cameron’s official spokesman told a regular Westminster media briefing: “I’m not going to speculate on something that hasn’t happened yet.
“I would simply say that we are committed to having a strong and stable financial sector, and when we say ‘strong and stable’ we also mean well-regulated.”
Asked if the Government would inject capital into the Co-op, Chancellor George Osborne said: “The Co-op have put out a statement about how they are going to strengthen their capital position.
“Those plans, like the plans of any bank, will be supervised by our new independent PRA, the prudential regulatory authority, and in Britain we now have a very strong independent regulatory system that looks at all of our banks including the Co-op and indeed here at the G7 we are going to be talking about what we can do to strengthen international co-ordination and regulation of our financial system.”
