Co-operative Bank: Damning report blames near collapse on botched takeover and blundering bosses

A damning report has blamed the Co-operative Bank's near collapse on a botched takeover and blundering bosses.

A review, by Sir Christopher Kelly, is scathing of the bank board both before and after its disastrous purchase of the Britannia Building Society in 2009.

The deal lumbered the Co-op with toxic debts which, along with other "serious failures", triggered a £1.5billion funding shortfall.

Former chairman and Methodist minister Paul Flowers, who was later at the centre of drug taking allegations, was able to get the job despite having no banking experience.

The 155 page report also condemns the way the wider Co-operative Group, of which the bank is just a part, is run.

The crisis at the bank contributed to the Co-op posting record losses of £2.5bn last year.

Sir Christopher said: "This report tells a sorry story of failings in management and governance in many levels.

"The roots of the shortfall lie in the merger between the bank and the Britannia  Building Society which should never have happened.

"Both organisations had problems. Bringing them together exacerbated those problems.

"It might have worked if the merged organisation had received first class leadership. Sadly it did not."

The Co-op's ill fated takeover of the Britannia saw it balloon in size, going from having £15bn of assets, 90 branches and 500,000 customers to a £50bn balance sheet, 344 outlets and 3.4m customers.

The Britannia, the country's second biggest building society, had grown commercial lending rapidly, which proved profitable through the boom years.

However, now disbanded regulator the Financial Services Authority was worried enough about the riskiness of the lending to put it on a watch list.

According to the report, the Co-op carried out "startling" few checks into the state of the Britannia's finances.

Analysis of 30 of its largest commercial loans was carried out over the space of just two days, two weeks before the deal was signed.

What the report calls the "debacle" at the bank was soon exposed when the credit crunch erupted, and lenders were staved of wholesale funding.

Regulators ordered the Co-op Bank to dramatically increase its capital cushion from £1.9bn to £3.4bn between 2009 and  January 2013.

Despite the impending crisis, the Co-op ploughed ahead with trying to buy 632 bank branches from Lloyds.

The deal eventually collapsed but revealed the scale of the crisis within the Co-op.

The review, which cost £4.4m, said regulators had been making "warning noises" about the Co-op's looming problems for some time.

Sir  Christopher is also critical of management after the merger, including Britiannia boss Neville Richardson who was made chief executive of the enlarged bank despite never having worked at a bank.

Mr Richardson denied Britannia's bad loans were to blame for the Co-op's demise, telling MPs the problems came after the takeover.

The report also condemns the group for hiring bank chairman Paul Flowers who was later engulfed in drugs shame allegations.

Reverend Flowers stepped down as chairman last June after the bank reported deep losses, which have since risen to £1.3bn for 2013.

He  has been charged with possession of a cocktail of drugs including cocaine and crystal meth.

The report says the bank hired "an individual who manifestly did not have the appropriate experience."

Sir Christopher, who pledges his support for the wider co-operative movement, nevertheless makes a series of recommendations for shaking up the way the bank is run, and for spotting future crisis.

He says: "Most of the lessons are not new. Some are so basic that it should be a matter of considerable regret to those involved in the past management and governance of the bank and group that they needed to be learnt again."