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Should you be concerned about the Co-op Bank downgrade?

CEO resigns after Moody's cuts bank rating to 'junk'

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The Co-operative Bank has been moved to reassure customers that their savings are safe, after a credit ratings agency cut its debt to ‘junk’ status. 

The mutual’s chief executive has resigned following the downgrade, after Moody’s expressed fears about the bank’s ability to cope with potential losses.

Moody’s said that the bank may require ‘external support’ if it could not improve its capital reserves, hinting at a potential need for government assistance. 

Here, Which? explains what has happened and how your savings are protected.

What is a credit rating and why do they matter?

A credit rating is a measure of the credit worthiness of an institution. It gives an indication of how well it is able to repay any money that has been lent to it and whether it may default and fail to pay back its debt.

A downgrade means that company looks less likely to be able to meet their debt obligations. The impact of this can be that it can become costlier for the downgraded company to borrow money, as they look much riskier to lend to. 

Why has Co-op Bank been downgraded then?

Moody’s is concerned that Co-op will need hundreds of millions of pounds to cope with future losses from its commercial property portfolio – these are the loans that the bank provided to companies to build properties such as office blocks and supermarkets. 

There are signs that its portfolio of commercial real estate loans contains an increasing number of loans close to default. Earlier this year, Co-op announced losses of £674m for 2012.

In a statement, Co-op Bank acknowledged that it needs to strengthen its capital position. It has also sought to reassure its customers via Twitter, stating that it doesn’t need government support. 

Are my savings safe with Co-op Bank?

Co-op Bank is authorised and regulated by the Financial Conduct Authority (FCA), which means that deposits are protected by the UK Financial Services Compensation Scheme (FSCS). The scheme protects savings of up to £85,000 with each institution. A joint account would be protected up to £170,000.

As a general rule, it makes sense to cap any savings with a banking group or building society at these levels.

What about investment and insurance products?

Co-op Bank also offers a range of investment products, including Stocks & Shares Isas and unit trust collective investment schemes. These are also covered by the FSCS, in the event that the company holding your investment defaults, up to £50,000 with each institution.

Insurance products are also protected by the FSCS, with up to 90% of the claim covered.  

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