By Steve Slater
LONDON (Reuters) - Britain's Co-operative Bank said it has lost current account customers as a result of a scandal involving its former chairman and a scheme that makes it easier for people to switch bank accounts.
The bank, which acknowledged the damage to its reputation, said its retail deposits and liquidity remained stable and it was too early to identify any significant trends.
British police last week arrested the former Co-op Bank chairman Paul Flowers as part of an investigation into the supply of illegal drugs.
Chancellor George Osborne has ordered an inquiry into the bank, just as its mutually owned parent attempts to push through a rescue plan that passes control of the lender to a group of hedge funds.
Co-op Bank said its recent troubles, competition from other banks and the introduction of seven-day account switching may have contributed "to an increase the bank has seen in the switching out of current accounts."
Investigations are likely to mean the bank will incur more costs than expected as it is subjected to more scrutiny from regulators and takes up management time, the bank said.
The update was included in a statement that detailed technical changes to the deal that will see bondholders take a 70 percent stake in the bank and the Co-operative Group keep 30 percent.
It also emerged that Aurelius Capital Management, one of the two biggest hedge funds involved in the restructuring of the bank, has sold its investment.
Aurelius has sold its stake to another hedge fund, Perry Capital, two people familiar with the matter said. Aurelius and Perry could not immediately be reached for comment.
Co-op tweaked the terms of its offer to bondholders to reflect changes in the value of bonds being traded. The bondholders will still exchange their debt, invest 125 million pounds, and get a 70 percent stake.
These technical changes aim to prevent an "unintended consequence" whereby professional investors would have been able to buy small numbers of bonds that allowed them to buy large numbers of deeply discounted shares in the bank, creating an arbitrage opportunity, a person familiar with the bank said.
(Additional reporting by Laura Noonan and Tommy Wilkes; Editing by Erica Billingham and Jane Merriman)