Lloyds was told of regulator's Co-op concerns in 2011: sources

Tue Jul 16, 2013 5:29pm EDT
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By Matt Scuffham

LONDON (Reuters) - Lloyds Banking Group (LLOY.L: Quote) was told in December 2011 that it was not clear the Co-operative Bank CPBB_p.L had a "feasible and sustainable capital plan" to buy more than 600 branches from Lloyds, regulatory and banking sources said.

The three sources, who have direct knowledge of the matter, said an email sent in December 2011 by Britain's financial regulator did not explicitly warn of a capital hole at Co-op, but said it was not clear that the mutual could transform itself into an organization capable of completing the purchase.

Lloyds chief executive Antonio Horta-Osorio and chairman Win Bischoff told a British parliamentary committee in June that they first became aware that the Co-op Bank was facing a capital shortfall in December 2012. The Prudential Regulation Authority said in June this year that the shortfall amounted to 1.5 billion pounds ($2.3 billion).

Lloyds, the Co-op and the PRA declined to comment.

Lloyds was ordered to sell the 632 branches by European regulators as part of its 20.5 billion pound ($31 billion)taxpayer rescue in 2008, but its choice to sell to the Co-op has been slammed after a big hole appeared in the mutual's finances.

The Treasury Select Committee quizzed Lloyds executives on their decision, since abandoned, to sell the branches to the Co-op, rather than to a rival start-up bidder NBNK.L, which said it made a higher offer.

Lloyds may be called back to the committee to explain why it persisted with Co-op as its preferred bidder.

Sources with knowledge of the matter said Andrew Bailey, then director of UK banks and building societies at the regulator, raised concerns over the deal, codenamed Project Verde, in an email dated December 20, 2011, which was sent to Co-op executives and forwarded to Bischoff.   Continued...

A pedestrian passes the head office of the Lloyds Banking Group in central London August 5, 2009. REUTERS/Stefan Wermuth