LONDON - British regulators said on Monday that they were starting formal investigations into Co-operative Bank after recent revelations about its former chairman and continuing questions about a capital shortfall of 1.5 billion pounds last year.
The Financial Conduct Authority and the Prudential Regulation Authority both said on Monday that they were undertaking so-called enforcement investigations that would examine the decisions that led to the bank’s near collapse last year, including the actions of the bank’s senior managers.
To avoid collapse, the bank agreed to a debt restructuring in which it relinquished a 70 percent stake to a group of bondholders. Those included the hedge funds Silver Point Capital and Aurelius Capital Management.
The Mail on Sunday, a British tabloid, reported in November that Paul Flowers, a former chairman of Co-operative Bank and a Methodist minister, was covertly filmed counting out money to buy illegal drugs just days after he appeared before Parliament to answer questions about his leadership at the bank.
Mr. Flowers, who left the bank in June, has apologized for his “stupid and wrong†behavior. He has been suspended by the church and was arrested as part of a police inquiry in November.
“The Prudential Regulation Authority confirms it is undertaking an enforcement investigation in relation to the Co-operative Bank, and as part of that investigation will consider the role of former senior managers,†the regulator said.
After the revelations about Mr. Flowers, Len Wardle, chairman of the Co-operative Group, the bank’s parent company, offered his resignation in November. Mr. Wardle said at the time that those events “raised a number of serious questions†for the bank and the group.
A separate, independent review by the British Treasury is expected to begin after the investigations by the Financial Conduct Authority and the Prudential Regulation Authority.
The Co-operative Group traces its roots to the Rochdale Society of Equitable Pioneers, a cooperative company formed in 1844 that paid a share of its profit back to its members as a dividend.
The group now provides a range of products and services, including operating grocery stores, funeral homes, pharmacies, an insurance company, a banking unit and legal services providers.
Its banking unit, Co-operative Bank, had been held out by British politicians as an alternative to larger lenders after the British government had to bail out several larger rivals five years ago, including the Royal Bank of Scotland.
But it became clear last year that Co-operative Bank had its own issues. The company reported a loss in 2012, mainly because of a large pool of delinquent commercial real estate loans stemming from its 2009 acquisition of Britannia Building Society. In May, Moody’s Investors Service cut its debt rating to junk status over concerns about its reserves for potential loan losses.
The bank then had to turn to its debtholders in June to make up a capital shortfall of £1.5 billion, or about $2.46 billion. The Co-operative Group is its largest shareholder after the restructuring, holding a stake of about 30 percent.
