Q&A with the Co-op: LA banking, Vickers & PFI

David Dunn is Head of Public Sector in the Corporate and Business Banking Division at The Co-operative Bank 

Room151: David, tell us about your history and footprint in the local authority (LA) sector.

David Dunn: The Co-operative Bank has been providing banking services to local authorities since the early 1900’s and over that extensive period we have built a very strong reputation in delivering competitive, efficient and innovative services to our LA customers. We were the first Bank to establish a dedicated Public Sector Relationship team. These senior managers are regionally based, their portfolios consist solely of public sector organisations and they have a depth of knowledge which cannot be found at a local bank branch level.

Our customers seem to appreciate this focussed approach – in the past 10 years we have seen an increasing number of LAs entrust their day to day banking requirements to us and we now bank around 34% of all LAs within England and Wales.

Now, more than ever LAs want a banking partner who will be proactive and flexible as the sector faces the challenges of the new environment within which they now operate.

R151: Counterparty risk is a big issue for local authorities; how do you provide security in these challenging times?

DD: Over recent years a number of LAs have learnt the hard way that when dealing with public money they need to be extremely cautious. 2008 saw the UK Government rescue several banks and I am pleased to say that our historically prudent approach to business that we did not require any additional support. We are a large organisation – £70 billion in assets, 12,000 staff and 9 million customers and customers are attracted to the Bank because of our trusted brand and long term position of financial strength which has enabled us to continue to support our customers despite the current difficult economic environment.

We are wholly self funded from customer deposits, –  for every £100 we lend we hold £107 on deposit. We do not rely on wholsesale markets and believe that raising funds from our own customers is the most cost effective method of increasing our capital base. Over the past two years we have seen our corporate deposits increase by 58% and 53% respectively.

Our position as a trusted alternative was highlighted in March last year when the FSA appointed us to run the first unclaimed assets fund on behalf of the UK financial services industry. The fund will administer an estimated £400m from dormant bank accounts whose owners cannot be traced.

R151: What trends have you seen emerge in local authority banking in recent years?

DD: There have been a number of distinct changes in the way LAs operate their banking. We have seen outsourcing of services to arms length organisations – housing stock, leisure services, back office functions etc. We have seen the majority embrace new technology in an effort to drive down costs and become more efficient including greater use of BACS, electronic data and image technology. More recently and with the increasing pressure on budgets we have seen the increasing profile and importance of Council Procurement departments in the letting and evaluation of tenders. It is a far more rigid  and objective process these days and whilst this can have benefits , I do think there is a danger of merely chasing the deal which offers the quickest win rather than one that offers better, albeit longer term benefits.

R151: What impact will the implementation of Vickers have on wholesale banking?

DD: Over recent years the consolidation in UK retail banks and the scope of their significant investment banking operations generated long term risks to the UK banking market. The Independent Commission on Banking aims to improve stability, increase consumer choice and make large complex banking groups easier to resolve in times of crisis. We have not been immune to the impact of the banking crisis but during the recent period of economic turmoil, The Co-operative Banking Group (CBG) has continued to deliver profitability and growth. While other banks received government bail-outs, we operated a sustainable model that did not lend out more than we had in customer deposits. This strength and trust in our brand has enabled us to attract even more customers and offer a real alternative to the shareholder and government owned banks.  The creation of a ring fenced retail subsidiary appears sensible, especially for larger more complex banks. We believe that all our activities should fall within the retail ring-fence.

R151: The Co-operative Bank also has a dedicated PPP/PFI team; how do you see that whole area changing in the coming years?

DD: The whole issue of social infrastructure remediation, redevelopment, requirements and funding is currently up for debate. The public sector has a wide range of infrastructure assets which are either redundant, under utilised, not fit for purpose or indeed moth balled as a result of:

– lacking cyclical maintenance historically due to lack of funds;

– not being in the right area;

– local demographics changing;

– service sector modernisation, consolidation – particularly in health;

Government’s austerity measures have had a massive impact. Whilst intended to drive through efficiency savings, they have in the short term had the opposite effect – knee jerk cuts in services. This has put on hold a wide range of needy upgrading / replacement of infrastructure assets.

From a funding perspective, whilst the risk profile for funding of these social assets via PFI has not altered, the costs of our raw material (capital) have. Consequently, overall funding costs and therefore project costs have significantly increased. The lack of long term liquidity for funding of these assets is also having an impact.

PFI remains an enigma to most people who continually state it is not value for money. However, the programme has delivered over £50bn of capital assets over a 12 year period across over 800 projects. Such projects were delivered on time and budget. Also the assets funded will be well maintained so that on hand-back at expiry of the concession period i.e. 25 years, the assets will be as good as new.

Funding structures will need to change, public sector attitudes will need to change and procurement timetables, which still take too long and cost too much, will need to be streamlined.