THE spin was that Co-operative Bank's decision to pull out of new business lending was a return to its traditional focus on retail customers.

But with a credit rating downgrade and a regulator keen to see capital increases across the banking sector, the benefits to the bank's finances were clearly more than a "knock-on effect".

It seems the best we can hope for is that an institution that seemed to offer so much to British banking will tread water for the next few years.

Here was an organisation owned by its members, which could take a long-term view, lend on an ethical basis and still make money while the shareholder-owned banks ailed.

In Scotland, where banking is dominated by Royal Bank of Scotland and Bank of Scotland's owner Lloyds Banking Group, Co-operative's planned purchase of Lloyds TSB Scotland could have given customers a much-needed alternative.

Its problems show that, no matter the ownership structure, any institution can over-stretch itself and be caught out by a change in market conditions.

Most importantly, Co-operative's retrenchment is damaging to businesses that are already struggling to find the financing to expand, a situation underlined by figures published yesterday showing UK companies last month repaid £2 billion more than they borrowed.

In the long journey to building a banking sector able to support Britain's longed-for economic resurgence, we have just taken one step back.