Should you worry about the Co-op Bank?

Ratings agency Moody's last week cut the Co-operative Bank's credit rating to junk' status. The move immediately knocked a third off the price of the bank's bonds, was partly to blame for the chief executive stepping down, and unsettled the bank's millions of customers across Britain.

It's more bad news for the Co-op after it had to pull out of a deal to buy 600 branches from Lloyds Banking Group. So just how serious is the downgrade?

The Co-op's woes stem from its ill-fated merger with Britannia Building Society in 2009. Britannia had more bad commercial property loans than anyone realised at the time, and these losses have drained the Co-op's capital, leading it to post a £662m loss last year. Moody's estimates that the bank needs to raise another £750m in capital to be safe. If the bank can't raise this through asset sales or from its parent group, it may need to be bailed out by the government.

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It sounds scary, but the first thing to note is that this is a specific problem with Co-op Bank, Britannia Building Society and the online bank Smile. It does not affect the Cooperative Insurance Society, which is ring-fenced. Likewise, any investments that you have taken through Co-op Bank, such as equity funds, are unaffected, as they are part of the

Co-op Insurance Society business too.

Even if you do have an account with Co-op Bank, Britannia Building Society or Smile, you may have nothing to worry about. The bank itself maintains that Moody's has got it wrong. It said it was "disappointed" with the downgrade and noted that "we have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements".

So far customers appear to be taking the Co-op at its word, with no evidence of increased withdrawals. Moreover, most analysts seem to think the bank can raise extra capital by selling chunks of the business or getting support from its parent company.

Furthermore, savings in British banks and building societies are protected up to £85,000, while joint account holders receive that amount of protection each. So even if the bank were to go bust, savers would get their money back within

seven days via the Financial Services Compensation Scheme (FSCS).

We've always recommended you keep your exposure to any one bank below the FSCS limit so if you haven't already, make sure you organise your finances so that you don't have more than £85,000 in any one financial institution.

But do note that the Co-op, Britannia and Smile all operate under the same banking licence, so that if you have accounts with all three, you still only receive total protection of £85,000.