The Co-operative Group is to launch a probe into how its banking arm ended up with a £1.5bn black hole which will need filling by small investors.
The group is close to appointing a senior independent figure to head the inquiry into its disastrous acquisition of Britannia Building Society and failed takeover of more than 600 Lloyds branches.
Last month, the Co-op disclosed plans to plug the gap by forcing bond investors, including many retail savers, to take a hit on their investment. They will be offered shares, resulting in a stock market listing for the group’s banking arm.
New group chief executive Euan Sutherland commissioned the inquiry, which is expected to report back in time for next May’s annual member meeting.
The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through the merger with Britannia in 2009.
Soured loans made by the Britannia were behind almost £470m of bad debt writedowns in 2012, which sent the group plunging to a £673.7m loss.
Concerns over the Co-op’s finances came to a head in May after credit ratings agency Moody’s downgraded the bank to junk status, just weeks after it pulled out of a deal to buy 631 branches from Lloyds Banking Group.
The Co-op, which has around 4.7m banking customers, is also planning to raise funds through the disposal of its insurance business, although the bulk of the rescue is coming from bondholders. The investor “bail-in” is scheduled for October.
Former HSBC executive Niall Booker has been appointed to run the Co-operative Bank, which has also ceased new business lending.
Mr Sutherland, the former B&Q boss who took over from Peter Marks in May, is keen to examine the circumstances around the Britannia and Lloyds deals, including the roles played by key executives.