* Bank head quits after Moody's downgrades debt ratings
* Moody's says bank could require government support
* Co-op acknowledges need to bolster finances
* Barry Tootell steps down as CEO of Co-op Bank
* Rod Bulmer temporary replacement
By Matt Scuffham
LONDON, May 10 The Co-operative Bank
ruled out government support on Friday, after a warning from
ratings agency Moody's that it might need taxpayers' money to
plug a capital shortfall prompted its chief executive to resign.
Speculation about Co-op Bank's weak capital position has
grown since it pulled out of a deal to buy 630 branches from
Lloyds Banking Group last month.
The bank, one of Britain's smaller lenders with 6.5 million
customers and a 1.5 percent share of the current account market,
said it did not need a bailout.
"We would like to reassure customers and members that we
haven't sought nor do we need government support," the Co-op
The bank is part of Co-op Group, Britain's
biggest mutual business, which is owned by individuals and
includes supermarkets, funeral services and pharmacies.
Britain spent a total 124 billion pounds bailing out Royal
Bank of Scotland, Lloyds Banking Group,
Northern Rock and Bradford & Bingley during the 2008 financial
crisis, according to the independent National Audit Office.
The financial regulator said in March that UK banks must
raise 25 billion pounds ($39 billion) of extra capital by the
end of the year to absorb any future losses on loans.
Industry sources have told Reuters that the Co-op's shortfall
could be in the region of 700 million pounds ($1.1 billion) to
750 million pounds.
The Co-op said Barry Tootell would step down as chief
executive of its bank and that Rod Bulmer, who has held a number
of senior positions at the bank, would step into the role until
a permanent replacement is found.
A source familiar with the situation said Tootell had
planned to leave following the collapse of the Lloyds deal, but
the Moody's report accelerated the process.
Moody's said late on Thursday the bank faced the risk of
substantial losses in its non-core portfolio - loans the bank
has identified as risky - and the low level of funds it had set
aside to deal with them left it vulnerable to losses.
The agency said there was "moderate potential for systemic
support likely to be forthcoming from the UK authorities," to
maintain regulatory capital levels.
That support could also come from the Co-op Group itself,
which has gross assets in non-financial operations of 6.3
billion pounds and net equity of 4.5 billion pounds.
Moody's lowered the deposit and senior debt ratings of the
bank and placed it under review for further downgrades.
The agency said the Co-op bank's capital levels were low
compared with peers. Co-op's core tier one capital ratio was 6.3
percent at the end of 2012, assuming the full implementation of
tougher global rules that are being phased in. Britain's
regulator wants banks to hold at least 7 percent.
Moody's said most of the risk on the Co-op's books stems
from loans it took on via its acquisition of the Britannia
Building Society in 2009.
The downgrade hit Co-op Bank's preference shares, which were
trading down 24 percent at 1442 GMT while spreads on the bank's
subordinated and covered bonds widened.
Co-op said it would drive through plans to improve its
capital position in the coming months.
The mutual said in March that it would sell its general
insurance arm to bolster its finances. Analysts have said that
business could fetch as much as 600 million pounds.
It has also agreed to sell its life insurance business to
Royal London Mutual Insurance for 220 million pounds.
Britain's Finance Minister George Osborne told reporters on
Friday that Co-op's plans to strengthen its capital position
would be supervised by the regulator. The Prudential Regulation
Authority (PRA) declined to comment.
Tootell's departure from Co-op Bank follows that of James
Mack, who stepped down as its finance chief in February and
leaves the bank with no permanent chief executive or finance
director. The bank made a loss of 674 million pounds last year,
hit by bad loans.