Is the Co-operative Bank on the brink of taxpayer hand-out?

It's looking increasingly likely the taxpayer may be on the hook for some form of financial assistance for the Co-operative Group. The troubled bank has already been ordered to raise around £1.5bn in order to buttress its financial reserves.

However around £500m of this looks likely to be supported by investors. How messy could things get?

Bad debts

It's already a rather tangled, interlocking money tree as things stand. Although the Co-op Group is a mutual, the Group also owns the Co-op Bank, which is a conventional plc. This bank is under considerable pressure to raise £1.5bn, a sum which all UK banks have to have to insure depositors from losses.

This £1.5bn sum was drawn up by the UK's Prudential Regulation Authority (PRA). But a major cornerstone of the Co-op's current problems relate to the bad commercial property debts run up by the Britannia Building Society, which the Co-op bought back in 2009.

To cut a (very) long story short, although some institutional investors could be forced to take a hit on the £500m component, this also includes around 15,000 small retail investors. (But better they to take this hit than the taxpayer, many would likely argue.)

BoE help?

If this avenue is rejected however by bondholders - a 77% approval rating is needed - then the Co-op could turn to the Bank of England. The Co-op wouldn't need the titanic injections of cash needed previously by RBS and Lloyds Banking Group, but some kind of temporary loan could be on the cards.

That would mean more borrowing for the Chancellor at a time when Osborne is attempting to keep the lid on Government borrowing.

The irony is by forcing the Co-op to raise its capital reserves, the PRA appears to be putting the Co-op through the financial grinder - at a time when the Government is talking up the mutual business model.

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