Threat to Co-op’s deal for Lloyds branches

The Co-op’s capital deficit is the first to emerge from regulators’ analysis of balance sheets after the Bank of England’s Financial Policy Committee suggested that the shortfall across the sector could be as much as £50bn.

The Financial Services Authority is expected to outline individual deficits in the coming weeks.

A list of options will be presented to the Co-op’s board next month, but analysts believe the deal could be scuppered, meaning that LLoyds could return to Plan B – a flotation of the 632 branches.

Another option is for Lloyds to find a European partner, possibly another mutual, to join the bid.

A spokesman for Lloyds said: “We are continuing negotiations with Co-op and are making good progress in creating a stand-alone challenger bank.”

A spokesman for the Co-op said the group remains in talks with Lloyds regarding the purchase of the branches.

There are reports that the Co-op could sell its non-life insurance business and its pharmacies operation to address the £1bn capital deficit.

More cash could be raised through selling part of the bank’s loan or mortgage book.

The Co-op reached an agreement to buy 632 branches from Lloyds Banking Group last July in a deal that would transform its banking operation into a serious rival to Britain’s dominant high-street banks.

Part-nationalised Lloyds said yesterday it will repay £6.6bn of long-term cash it borrowed in 2012 from the European Central Bank.

Lloyds, which is 41 per cent owned by the UK taxpayer, said it would repay nearly three-quarters of the money it borrowed.

Lloyds’s strong balance sheet and liquidity position means it no longer needs the funds.