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Lloyds was not pushed to sell branches to Co-operative Bank - lawmakers

A man walks past the entrance to the head office of Lloyds Banking Group in the City of London December 11, 2013. REUTERS/Olivia Harris

By Matt Scuffham

LONDON (Reuters) - Lloyds Banking Group's aborted attempt to sell hundreds of branches to the Co-operative Bank was not influenced by politicians, a committee of lawmakers said on Wednesday.

The sale collapsed in April last year and the full scale of Co-op Bank's problems later became apparent when a 1.5 billion-pound capital shortfall was exposed and it was forced into a restructuring which saw it fall under the control of bondholders, including U.S. hedge funds.

Parliament's Treasury Select Committee, which examines the work of Britain's finance ministry, has conducted an inquiry into whether undue political pressure was applied to Lloyds to sell the 631 branches to the Co-op.

Britain's Conservative and Liberal Democrat parties pledged to promote mutuals to create a more competitive banking industry when they agreed to form a coalition government while the opposition Labour party has strong links to the Co-operative Group, from which it has received donations.

Lloyds was ordered to sell the branches, code named Verde, by European competition regulators as a condition for approving its 20.5 billion-pound ($34 billion) government bailout in the financial crisis.

Peter Levene, the ex-chairman of rival bidder NBNK, told the committee that former Bank of England Governor Mervyn King informed him that Lloyds' decision to sell to the Co-op was politically motivated.

But the committee said in a report on the matter that it had found little evidence to back up Levene's claim.

"The committee has seen scarcely any evidence in support of this claim. The allegation was rejected by every other witness who appeared before the committee," the committee's chairman Andrew Tyrie, a Conservative lawmaker, said on Wednesday.

Tyrie added the committee had not seen evidence that anything other than Lloyds' commercial objectives determined its decision, he said.

"It seems improbable that any such political interference could have been concealed by so many people and for so long. The government publicly stated its support for Co-op's bid, but the committee has not seen anything to suggest that this constituted improper pressure or bad faith on anyone's part," he said.

Lloyds, which has consistently denied that political pressure was applied, said its position was vindicated by the committee's findings.

"The Treasury Select Committee report clearly concludes that there was no political interference during the negotiations with the Co-op," it said.

Lloyds subsequently re-branded the branches as TSB and floated the business on the London Stock Exchange.

Co-op Bank, which has 4.7 million customers, hit trouble after racking up big losses on commercial property, many of which were acquired through its 2009 takeover of the Britannia Building Society.

The Treasury committee recommended that an investigation into Co-op Bank's failings that has been commissioned by Britain's finance ministry and an investigation by Britain's Financial Reporting Council should focus on the role of Co-op Bank's auditor, KPMG, and Britain's financial regulator.

"Each of the backstops -- Co-op Bank itself, KPMG as its auditor, and the FSA as its regulator -- failed to uncover the bank's capital shortfall until it was too late," Tyrie said.

The committee said the biggest responsibility for the bank's problems lay with the bank's leadership. It said the bank's corporate governance structure up until the middle of last year was "entirely inadequate for a bank of any size".

The committee said the bank's board was dominated by members from its parent, the Co-operative Group, who lacked financial services experience. The bank suffered embarrassment last year when its former chairman Paul Flowers, a former Methodist minister, pleaded guilty to possessing illegal drugs.

Co-op Bank said in response that it had made significant progress towards reform over the past year.

"The bank's board looks very different today and is now managed and governed independently to the group. There is an entirely new executive team with the depth of financial services expertise to turn the bank around," it said.

(Reporting by Matt Scuffham, editing by David Evans)