The Co-op suggests – co-operative interest? May 10, 2013 at 9:00 pm

Listening to the sad news about the Co-op bank today on the radio, it occurred to me to wonder if with-profits banking might work for them. Let me explain.

  • Some banks, the Co-op included, need more equity. Indeed, if Brown-Vitter get their way, all big banks will need a lot more equity.
  • No one wants to buy new equity.
  • And debt holders want interest.
  • An old fashioned insurance solution* to this problem was the ‘with profits’ policy whereby instead of getting a coupon, investors still have a senior claim on return of principal, but interest is paid in equity.
  • So why not offer, or even require, that interest paying bank accounts pay a certain fraction of interest in equity, at least until the bank reaches ‘very well capitalised’ (whatever that means)?
  • You would of course need an easy cheap way for deposit holders to sell these equity stakes, but that’s OK; for sufficiently low levels of leverage, bank equity would have a rather stable price (like a utility stock), and so this should not be beyond the wit of bankers.
  • The dilution for existing shareholders would of course be vicious. Sorry, I can’t see a way around that.

*OK, this isn’t quite what with profits insurance policies do. But it is close enough for these purposes.

One Response to “The Co-op suggests – co-operative interest?”

  1. Dilution is the only way to go. Depositors would be up for it, I imagine (alternative is zero interest).