King Warned Of Political Push For Co-op Deal

By Mark Kleinman, City Editor

The Governor of the Bank of England warned one of the bidders for more than 630 Lloyds Banking Group branches that its offer would fail because of "a political desire" to see a rival proposal from the Co-operative Group succeed.

Sky News can reveal that Lord King, who stepped down as Governor in June, told Lord Levene, the chairman of NBNK Investments, that the Co-op's bid had won political favour in Whitehall that would be difficult to overturn.

The disclosure of Lord King's remarks threatens to provide a 'smoking gun' for those who have insisted that there was explicit political interference in the £1.5bn branches auction as ministers sought to promote the mutual ownership model in the banking sector.

George Osborne, the Chancellor, and Lloyds directors including Sir Win Bischoff, its chairman, have consistently denied any attempt by ministers to influence the outcome of the auction.

The intervention of Lord King provides the latest twist after an extraordinary week in which a series of allegations have been made about the private life and professional competence of Paul Flowers, the Co-op Bank's former chairman.

The meeting between the then Sir Mervyn King and Lord Levene is understood to have taken place in July last year, just before Lloyds announced a firm intention to sell the branch network to the Co-op on July 19, 2012.

"He [Lord King] said that there was a political desire to see the Co-op acquire the branches," said a Bank of England insider familiar with the discussion.

News of the meeting, which is said to have been brief and focused on the Lloyds auction, provides the most powerful evidence so far of a belief within the most senior echelons of the City that Coalition ministers had a direct preference for the Co-op to expand by buying the branches.

Lord Levene and the Bank of England both declined to comment on last year's meeting.

It is not clear whether Lord King referred to individual politicians during the meeting with Lord Levene but his remark could nevertheless embarrass Mr Osborne, who publicly enthused about the Co-op Bank's expansion and who announced on Friday the terms of an independent inquiry into the mutual's troubles.

Bank of England insiders said the former Governor had harboured reservations about the Co-op's ability to undertake such a transformational deal although it is unclear whether such doubts were expressed during his conversation with the NBNK chairman or the extent to which they were then raised with banking regulators.

The Treasury said on Friday that the decision about the sale of the branches had been a matter for the boards of the companies and the relevant regulators.

The takeover of the 'Project Verde' network of 631 branches would have trebled the Co-op Bank's size and created a bank with nearly 8 million customers and a balance sheet of more than £30bn.

The Co-op originally won preferred bidder status from Lloyds on December 14, 2011. However, after discussions between the two parties stalled, Lloyds then announced on May 1, 2012 that it was no longer in talks with the Co-op on an exclusive basis and would consider other bids.

NBNK then assembled an improved offer but again lost out to the Co-op in July last year.

The Treasury is reported to have intervened in Brussels to help smooth a path for the Co-op to gain preferential treatment in relation to its capital position, with one aide to Mr Osborne telling the Financial Times this week: "We are totally unashamed in trying to help a British institution [the Co-op] and the British economy."

The decision to sell the Verde branches to the Co-op despite concerns about the mutual's ability to complete the deal has inflamed political tensions this week, with Labour's close links with the Co-operative Bank highlighted by Conservatives.

In turn, senior Labour figures have accused ministers of failing to undertake sufficient due diligence on the Co-op Bank to ensure that it was in a sufficiently sound financial position to take on the Lloyds branches.

The Co-op has now been forced to seek a £1.5bn rescue deal for its banking arm, which is reliant on a £125m capital injection from a group of hedge funds. Investors will vote on the proposed deal during the next two weeks.

NBNK has repeatedly argued both that it offered a better financial deal to Lloyds than the Co-op and greater assurances that it would be able to execute an agreement.

In evidence provided to the Treasury Select Committee earlier this year, the acquisition vehicle also warned Lloyds that it believed the Co-op was in a worse financial position than had been publicly acknowledged and that the mutual would be forced to withdraw.

Senior City sources now believe that one of the motivations for favouring a Co-op deal with Lloyds was that the well-capitalised Verde network would help to ease the mutual's difficulties over IT systems, management inexperience and doubts about the robustness of its capital position.

The Verde branches are now being carved out of Lloyds under the TSB brand, with a stock market flotation expected to take place next year.

Sky News revealed last week that the former boss of RSA Insurance, Andy Haste, is being lined up to chair the new TSB public company.

In an interview with Sky News earlier on Friday, Lord Levene said NBNK had been told by its advisers that a bid by the Co-op was "not viable".

"What I did was… [to] take that report and give it to the chairman of Lloyds Bank who I knew very well and say to him, 'Look…I really think before you press the button on this you ought to read this report for yourself because I think you will see from this that the Co-op is not going to be the answer for you. Subsequently the Chairman… denied that he had ever seen that piece of paper."

Lloyds declined to comment.

A series of regulatory probes now awaits the Co-op and some of its former directors, with the FCA and PRA saying separately on Friday that they were already undertaking work to establish whether they should launch formal enforcement investigations.

A separate probe commissioned by the Treasury and undertaken by an as-yet unidentified figure from the world of banking or law will also take place.

In a statement on Friday afternoon, it said its inquiry would "cover the actions of relevant authorities (regulators and government) and the institution itself, including prudential issues, governance (including the appointment of senior staff) and acquisitions".

The Treasury's inquiry will not begin until after any PRA and FCA enforcement action has been concluded.

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