Co-Op Bank’s Initial Plan to Boost Capital Was Rejected by FSA

Co-Operative Bank Plc had an initial plan to bolster capital rejected by regulators, contributing to a delay in a second recovery program being agreed with the customer-owned bank, according to the Prudential Regulation Authority.

U.K. regulators decided Manchester, England-based Co-Op Bank may need capital in 2011 and waited until “there was greater visibility about the possible outcome” over its intention to buy branches from Lloyds Banking Group Plc (LLOY), PRA Chief Executive Officer Andrew Bailey said in a letter to bond investors seen by Bloomberg News today.

Co-Op Bank said in June it will swap some debt for equity as part of a plan to raise 1.5 billion pounds ($2.4 billion) of capital after the failure of its bid for 632 Lloyds branches exposed the deficit.

The Financial Services Authority, then banking regulator, “rejected the first plan produced by management of the Co-op Bank as inadequate,” wrote Bailey, in answer to a question on why regulators allowed 18 months to elapse between identifying a shortfall and a plan being announced. “This led to the current plan being produced by the new management.”

Russ Brady, a spokesman for the parent Co-Operative Group Ltd., and an official at the PRA declined to comment.

To contact the reporters on this story: Howard Mustoe in London at hmustoe@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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