Tag: co-operative

Over the past few years, the term ‘bail-out’ has been a common phrase. But, what about the term ‘bail-in’? The latest bank to face financial ruin is the Co-operative Bank, but instead of turning to the tax-payer for a rescue, £1.5 billion will come from bond holders being offered shares in the bank. This will mean that the bank will become listed on the stock market.

Back in 2009, the Co-operative Bank bought Britannia Building Society and it seems that this was the start of its downfall. It took over many bad mortgage loans and loans to companies, and these played a large part in its current financial difficulties.

In order to rescue the bank and raise the capital needed to absorb current and future losses, without turning to the tax-payer, bond-holders of £1.3 billion of loans to the bank will be asked to swap them for shares and bonds, thus leading to significant losses for them. These bond-holders include 7000 private investors.

Since the financial crisis five years ago, the conventional banking model has seen much criticism and many suggested that the mutual structure of the Co-operative provided a better model, creating trust, due to its many stakeholders, who are not as focused on profitability and returns as those shareholders of a listed bank. However, the problems of the Co-operative seem to have put paid to that idea. The bail-in will mean that the bank is now listed on the stock market and thus will have shareholders expecting returns and profitability. This will undoubtedly change the focus of the bank. Euan Sutherland, the new Chief Executive said:

We are very clear that the bank will remain true to responsible and community-based banking and retain its ethical investment stance … Clearly there are lessons to learn and clearly there will be a time to look back and do that but, to be honest, in the last six weeks, where I have been involved with the Co-operative group, we have focused on driving a very solid future for this bank.

The good news is that the savings of those in the Co-operative are safe and taxpayers will not have to fork out any more money.

Yet, the co-operative structure of the bank has long been praised by customers and government alike. But is it perhaps this structure, which has led to its collapse? Furthermore, will the change in structure that will see it listed on the stock market, lead to a change in its approach to banking? The following articles consider the latest bank to run into difficulties.

Webcast

Co-op Bank unveils rescue plan to tackle the £1.5bn hole BBC News (17/6/13)

Articles

Co-op Bank travails show weakness of mutual model Financial Times, Sarah Gordon (21/6/13)
Co-operative Bank to list on stock market in rescue deal The Guardian, Jill Treanor (17/6/13)
Troubled Co-operative Bank unveils rescue plan to plug £1.5bn hole in balance sheet Independent, Nick Goodway (17/6/13)
Co-op Bank announces plan to plug £1.5bn hole Which? (17/6/13)
The Co-operative Bank and the challenge of finding co-op capital The Guardian, Andrew Bibby (13/6/13)
Co-op Bank seeks to fill £1.5bn capital hole Sky News (17/6/13)
Does Co-op Group deserve to keep control of Co-op Bank? BBC News, Robert Peston (9/7/13)

Questions

  1. Why did the Co-operative Bank move into financial trouble?
  2. What are the key characteristics of a Mutual? Are they disadvantages or advantages?
  3. What is a ‘bail-in’? Who will gain and who will lose?
  4. The Co-operative Bank will now be listed on the stock market. What does this mean?
  5. What are the advantages and disadvantages of floating a company on the stock market?
  6. Why are all banks required to hold capital to absorb losses?

John Von Neumann was a mathematician and one of his many accolades was applying mathematics and his observations of traditional games to create a new discipline – Game Theory. This involves a mathematical approach to decision making whereby different strategies can be assessed. It a tool that not only can be used in Economics, but also can be applied to a broad range of areas and fields of study.

Just as I arrived at work, I was listening to Radio 4 and heard the introduction to the programme In our Time. This one in particular caught my attention because of the name mentioned – Von Neumann, and after arriving in my office I then listened to the discussions surrounding game theory.

The main link is to the discussion from BBC Radio 4, led by Melvyn Bragg, with guests: Ian Stewart, a Professor of Mathematics from the University of Warwick; Andrew Colman, a Professor of Psychology at the University of Leicester and Richard Bradley, a Professor of Philosophy from the LSE. I’ll keep it brief and simply say enjoy!

Podcast

Game Theory (also at) BBC Radio 4, In our Time, Melvyn Bragg (10/5/12) (Programme details)

Articles

Game Theory cannot predict broadcasting future Financial Times, Andrew Edgecliffe-Johnson (4/5/12)
Game Theory, in the real world Phys Org (2/5/12)

Questions

  1. What is game theory? How is mathematics relevant here?
  2. The discussion talks about co-operative and non co-operative games. What is the difference between them?
  3. In the game – walking down the street – draw out the matrix and show whether a Nash equilibrium exists.
  4. Draw out the matrix for the game ‘Rock, Paper, Scissors’. How can game theory be applied to this game? What is the best strategy to win this game? Can there be a winner?
  5. Draw out the matrix for the problem of littering when it is non co-operative. Is there a Nash equilibrium?
  6. What is the Prisoner’s Dilemma? Give some examples of it. Explain why it is an example of a dominant strategy game.
  7. How is game theory relevant to broadcasting? Think about the role of auctions and also the information given in the Financial Times article.
  8. Explain how game theory is relevant to the Cold War.