MPs to grill Lloyds as Co-op Bank is saved

LLOYDS’ senior managers will face questions from MPs today over the collapse of the sale of branches to the Co-operative Bank, which was saved yesterday in a move that analysts hailed as a blueprint for future rescue deals.

Tory MP David Davis criticised his own party's Chancellor. Picture: Getty

The Bank of England’s Prudential Regulation Authority (PRA) vowed to “hold the Co-op to its plans”, which will see bondholders forced to take losses on their investment as part of the “bail-in”, due to begin in October.

No taxpayers’ money will be involved in the £1.5 billion rescue. Instead, investors will be offered bonds and shares in the bank, resulting in a partial stock market listing. The lender will continue to be majority owned by the mutual Co-operative Group.

The hangover from the failure of Co-op to buy 632 branches from Lloyds Banking Group will continue today after a senior Conservative MP called for further explanation.

Antonio Horta-Osorio and Sir Win Bischoff, chief executive and chairman of Lloyds will bear the brunt of the scrutiny as they face the Treasury committee led by Andrew Tyrie.

In a newspaper article yesterday, David Davis pointed the finger at Chancellor George Osborne as he called on the Treasury to “explain what role it played in the bidding process. In particular, why reject a strong bid from a well-funded plc in favour of an inferior bid from an institution that was clearly unable to fund the deal”.

Lloyds dismissed a bid from NBNK, a listed investment vehicle, in favour of the Co-op in 2011 despite concerns the mutual would struggle to fund the deal.

The £750m transaction, known as “Project Verde”, fell apart in April, while the Co-op’s credit rating was downgraded by Moody’s to “junk” status.

Ian Gordon, a banking specialist at Investec Securities, said: “The main charge Lloyds will have to answer is why agree a sale to a party who did not appear to be offering the best price.”

Gordon predicted that Horta-Osorio and Bischoff would also tell MPs that the prospects of a flotation of the Verde assets had “improved immeasurably” because banking sector bad debts had fallen sharply.

“Horta-Osorio may even be a little smug at the meeting,” Gordon said. “They may have wasted a few hundred million on the abortive sale talks with the Co-op but they may recoup that through a float in 2014.”

The Bank of England’s latest systemic risk survey, published yesterday, shows just 8 per cent of risk managers in the finance sector think there is a strong chance of a “high-impact event” over the next year – down from 20 per cent in October and the lowest level since the financial crisis erupted in 2008.

The PRA is due to set out further details on the financial positions of all eight major banks and building societies in a briefing on Thursday.