Determining who should carry the can for a bank’s bad debts took on a twist last week when activist investor Mark Taber challenged the UK regulator on its demands for a bank to raise more capital. The bank in question, Britain’s Cooperative Bank, is being asked by the Prudential Regulatory Authority (PRA), the UK banking watchdog, to raise capital to protect against an expected shortfall. It has proposed to do this via the issue of a fixed-income instrument by Co-operative Group and the issue of new shares by the bank.

Where Mr Taber has issue is that some of the recapitalisation will have to be made up by “investors in the bank’s subordinated capital securities”. He cites two statements from the authorities that suggest they were aware of a shortfall going back two years. He also notes that the bank’s last audited accounts said, “Adequate capitalisation can be maintained at all times even under the most severe stress scenarios, including the revised FSA ‘anchor’ stress scenario.”, which the auditors should have checked with the regulator.

If these are the facts, his assertion is anyone trading in the bank’s assets could not have been doing so at the correct price, which “created a false market in Bank’s London Stock Exchange listed preference shares and PSBs, in direct conflict with the role of the regulators to protect investors’ interests.”

He also argues that the capital ratio for the Co-operative Bank is set too high given its relative status in the market and that the 15,000 bondholders of the bank “are being expected to front load the balance sheet now to cover these unlikely maximum future writedowns while the Co-op Group, despite having presided over the collapse of its banking arm, keeps the lion's share of the Bank and will benefit most from the likely future writebacks.”

There is a wider point of concern here. Governments, central banks and regulators in many countries have interfered with the support of banks, often matchmaking mergers and acquisitions which leave a firm that had no problems in possession of toxic or simply unusable assets. An example of this is Lloyds Bank’s ownership of 639 HBoS branches, which it is obliged to sell under EU regulation, but as it bought the only bank big enough to need them (HBoS), it simply cannot.

Perhaps failure should be recognised more clearly by those in charge.