Troubled U.K. Bank Seeks New IT StrategyTroubled U.K. Bank Seeks New IT Strategy

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The failure of a major IT system is adding to the serious issues affecting the smallest Main Street U.K. bank -- the £30 billion ($46 billion) Co-operative Bank.

The brand has been thrown into chaos after the Moody's credit ratings agency downgraded its shares to junk bond status at the end of last week. Meanwhile, a report issued Monday by analysts at one of its rivals, Barclays, has caused even bigger concerns over its immediate future, suggesting it might be facing a capital shortfall of as high as £1.8 billion ($2.8 billion). The bank also reported losses of £599 million ($916 million) in March for its last full year.

Compounding its woes is work that the bank now faces in fixing its IT strategy. In March, when it released those surprisingly bad numbers, it admitted it had to write off £150 million ($229 million) of a planned £250 million ($382 million) new banking platform, which had to be junked. In its results, the bank said it is also having to account for an investment of £45 million ($69 million) relating to the Finacle computer software implementation project, which was commissioned and now has to be amortized over a period of 10 years. It also has to carry a further £18 million ($28 million) of assets relating to this project "held within property, plant and equipment as computer equipment and assets in course of construction."

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The Finacle program was supposed to process transactions more quickly for Co Op's 6.5 million customers. Work on the suite began a number of years ago, before Co Op purchased a smaller financial services company, the Britannia Building Society, in 2009. But management had stalled work on the system, intending to instead move onto software from yet another acquisition -- some 600-plus branches from Lloyds, one of the banks that, unlike Co Op, had to be bailed out by the British government at the end of 2008.

As part of the deal for the European Union back that state aid, Lloyds agreed to shed some assets. That resulted in Co Op's planned £750 million ($1.1 billion) acquisition of the branches. In addition, Co-op and Lloyds planned to lease, under a managed service agreement, the proven Lloyds IT platform, which would be run for the planned enlarged Co-operative Banking Group "under commercial market terms."

Unfortunately for the Co Op, that deal collapsed last month, leaving Co Op to somehow find a new banking system. It clearly doesn't want to start from scratch and build another computer platform, especially when the bank also has to plug a gigantic fiscal hole.

So serious are the Co Op's issues that it looks increasingly likely it may have to be bailed out by the taxpayer. However, after Moody downgraded the bank by six notches, the Co Op insisted it was in good shape. "We plan to significantly simplify our business, which will greatly improve our operational effectiveness and also enhance our capital position in the process," the bank said in a statement.

The bank declined to answer questions on its plans.