A bitter row broke out last night over what triggered a £1.5bn capital hole at the Co-operative Bank after the financial regulator rejected comments made by the lender's former chief executive about where problem loans originated.
Appearing before the Treasury select committee, Neville Richardson, who left the Co-op in 2011, mounted a robust defence of the loan book the mutual acquired when it merged with Britannia building society.
Mr Richardson previously led Britannia and became chief executive of the Co-op's banking arm after the merger.
The quality of Britannia's loan book – particularly its commercial property portfolio – has previously been blamed for the Co-op's capital shortfall.
Andrew Bailey, who heads the Prudential Regulation Authority unit within the Bank of England, told the Treasury committee in July that: "The main issue was around the Britannia assets."
Mr Richardson strongly refuted this on Wednesday, saying that only about a third of the impairments and other losses reported by the Co-op Bank in the past 18 months came from commercial property loans made by the Britannia.
"I have no idea why [Mr Bailey] would say that given the figures I have in front of me," said Mr Richardson.
He said that when he left the Co-op in 2011 – a move triggered by the mutual's pursuit of 630 branches from Lloyds Banking Group – the business was in good shape and there were no signs to suggest regulators or auditors had concerns. By 2012, when the Co-op made significant provisions against bad debt, he said the Britannia loans had been on the books for 6-10 years.
"It defies credibility to say loans suddenly become bad after 6-10 years," Mr Richardson told the committee.
After the hearing, the Bank of England said: "We strongly disagree with Neville Richardson's view regarding the Britannia loan book situation. The evidence Andrew Bailey gave to the TSC was correct."
The BoE's view was backed up by the Co-op last week. Announcing first-half results Niall Booker, who now runs the banking business, said about three quarters of the impairments taken against the corporate loan book came from Britannia.
Mr Richardson blamed the Co-op bank's demise on two factors. He said the former management team was distracted by its bid for the Lloyds business, which meant it was not managing emerging risks in the loan book. Also, he said a tougher approach to provisioning against souring loans introduced by the regulator at the end of 2012 had left the Co-op exposed.
He defended his own role, saying that he warned the former Co-op chief executive, Peter Marks and its chairman, Len Wardle, that bidding for the Lloyds business when it was already engaged in other major transformation projects would be "disastrous".
Mr Richardson, who received £1.39m when he left the Co-op, described his departure as "the toughest decision of my life". "I could have earned a lot more keeping my head down and not saying anything," he said.
Andrew Tyrie, who chairs the committee, said: "There appears to be a yawning gulf between the evidence the Committee heard today from Mr Richardson and the evidence we heard previously from Mr Bailey. The Committee will be investigating this a good deal further."
