Co-op Bank was 'encouraged' to buy Lloyds branches: ex chairman

By Matt Scuffham

LONDON (Reuters) - Britain's Co-operative Bank (CPBB.L) was 'encouraged' but not pressured by the government to buy hundreds of branches from Lloyds (LLOY.L) before its 1.5 billion pound ($2.4 billion) capital shortfall was exposed, its former chairman told lawmakers on Wednesday.

Paul Flowers told the UK's Treasury Select Committee, which is examining why the deal was pursued, that then financial services minister Mark Hoban gave the Co-op the impression he wanted them to proceed.

"Mr. Hoban was, I believe, encouraging the process on behalf of the Treasury, on behalf of the government. I can make no other interpretation of the cause than that," Flowers told parliament's Treasury Select Committee.

Flowers also said the Co-op was told by other lawmakers that Business Secretary Vince Cable supported the deal.

Lloyds was forced to sell 632 branches by European regulators as the price of its government rescue in 2008, but its decision to sell to the Co-operative Bank has been criticized since a big hole appeared in the mutual's finances, prompting allegations that politicians had influenced the choice of buyer.

The deal, which was meant to create a new challenger to Britain's biggest banks, collapsed in April and the 1.5 billion-pound ($2.4 billion) capital shortfall at the Co-operative Bank was identified by Britain's financial regulator soon after.

Flowers said the Co-op had not been under political pressure to pursue the deal.

"There was not political interference, there was not political pressure but there was political goodwill for the deal to proceed," he told the committee.

Peter Levene, former chairman of rival bidder NBNK (NBNK.L), has said in written evidence to the committee there appeared to be political interference in the bidding process.

Conservative lawmaker Andrew Tyrie, chairman of the committee, said there were a number of contradictions in Flowers' evidence.

"Your (Flowers) chairmanship has severely tarnished the Co-operative model," he said at the end of the evidence session.

($1=0.6233 British pounds)

(Reporting by Matt Scuffham; Editing by Laura Noonan and Greg Mahlich)