Bank executives knew about shortfall last year

Executives at Lloyds knew about the capital hole in the Co-operative Bank over six months ago.

While giving evidence to the Treasury Committee inquiry over the collapse of the Project Verde deal for the Co-operative Group to acquire 632 Lloyds branches, António Horta-Osório, Group Chief Executive of Lloyds, said he was first aware of the shortfall last December.

Following a review of its budgets, the Co-operative Group submitted a revised plan for the takeover of the branches in December, which was set to be completed by March. Mr Horta-Osório said: “In the analysis … it was clear to us from that information, indirectly that there was a shortfall of capital. That was when we first had concerns about their capability of closing.”

The combined plan outlined how the Co-operative Bank and the Lloyds TSB spin-off would look. At this point Lloyds formally asked the Group how it would cover this shortfall, according to Mr Horta-Osório. He said the Group outlined a number of options including the disposal of its asset management and insurance business — both of which have been put up for sale.

Sir Winfried Bischoff, Chair of Lloyds, added: “The Co-op looked in reasonable shape, but obviously, once it had looked at its own position and then come up with a revised plan, that caused us some concern.”

During the June 18th meeting, the committee’s chair Andrew Tyrie asked Sir Winfried if the decision to award the Verde deal to the Group was made on political rather than commercial grounds, following press speculation the government was pushing the mutual model.

Sir Winfried denied that Lloyds had been influenced by the government. He said: “What the board looked at was financial and the ability to execute. Those were the only two things that we looked at.”

One of the other final bidders for Verde was NBNK, which made an offer that was almost double proposed £350 million put forward by the Group. Committee member Brooks Newmark, Conservative MP for Braintree, asked why the Co-op bid was favoured by the Lloyds board over NBNK.

Sir Winfried said: “The Co-op had a brand name. You may think it had been tainted, but it had a brand name. It had an established bank. It had a relationship with the FSA. It had staff and it had a rating from two rating agencies. NBNK had none of those.”