Business

Osborne: No Treasury pressure on Co-op over Lloyds deal

Co-op bank Image copyright PA

Chancellor George Osborne has said the Treasury did not press for a deal for Co-op Bank to buy 632 Lloyds branches.

In a letter to the Treasury Select Committee, Mr Osborne said the deal "was a matter for Lloyds and the-then regulator, the FSA".

The former chairman of Co-op Bank, Paul Flowers, and Lord Levene have both accused the Treasury of interfering.

Also, a report by Newsnight said the Treasury argued with regulators about a law that could have blocked the bid.

The chancellor has been answering questions about the Co-op issue at a hearing of the Treasury Select Committee.

Labour MP Pat McFadden said the committee had heard "conflicting advice on whether there was political pressure", citing testimony from Lord Levene, who was leading a rival bid.

In written evidence submitted in January, Lord Levene wrote: "We had contacts with senior banking figures, during which it was made clear to us that pressure on LBG [Lloyds] to appoint the Co-op was coming from within the Coalition."

But the Chancellor denied there had been an attempt to interfere in the process.

Newsnight Investigation

According to a report by the BBC's Newsnight, the Treasury disagreed with the Financial Services Authority (FSA) over a rule that could have blocked Co-op Bank's takeover of 632 Lloyds branches.

Co-op Bank's size meant its parent company should have been regulated like a bank under EU rules.

The FSA in 2012 wanted the rule to apply, but the Co-op said it would mean that the deal could not go ahead.

But the Treasury argued that the rule should not apply.

Mr Osborne in his testimony said lawyers disagreed on the relevance of the EU rules, and in the end the Co-op supplied its own plan, with which the FSA agreed.

The rules would have meant authorities could direct Co-op to raise new capital, to reorganize the financial business, and to recruit a new board.

The extra regulation could have meant its other businesses shouldering any bank losses.

The FSA clashed with the Treasury in March 2012, and the Co-op warned members it may not go ahead and do the deal it had been working on for a year, Newsnight discovered.

But the waiver was approved by top bank regulator Andrew Bailey in June that year, and within weeks the deal was back on.

Bank responsibility

The EU rules were brought in to ensure that companies owning a bank took on more responsibility.

Paul Flowers, the bank's former chairman, told Newsnight last week the Treasury "wanted" the Lloyds deal to go ahead.

The Co-op proceeded with the bid before being forced to abandon it because of a £1.5bn capital black hole.

The regulatory exception later allowed the Co-Op to avoid having to rescue its bank on its own, instead asking bondholders to swap their bonds for shares.

The Lloyds branches became TSB, and will be sold to investors in a share sale.

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