Treasury would have 'overruled' regulator in favour of Co-op bid

The Chancellor’s letter followed a claim by disgraced former chairman of the Co-op Bank, the Reverend Paul Flowers, who accused the government of exerting “considerable” pressure in favour of the lender’s acquisition of the branches.

“There was pressure certainly from Mark Hoban [the former Financial Secretary to the Treasury] but I believe and know that that originated much higher up with the Chancellor himself,” said Rev Flowers in a BBC interview last month.

Mr Osborne denied the claim and said the decision on whether to accept the Co-op’s bid had been a “commercial decision” and “a matter for Lloyds”.

He added: “While the Treasury did not apply undue pressure, Verde was – and remains - a matter of very significant interest for us. Indeed, the Treasury has a legal obligation to take such an interest, given the State aid agreement that the previous government entered into in respect of the state support that Lloyds received during the financial crisis.”

Sir Win Bischoff, the outgoing chairman of Lloyds, and Antonio Horta-Osorio, the bank’s chief executive have already denied claims they favoured the Co-op bid.

These denials followed allegations from Lord Levene, the former Lloyd’s of London chairman who led a rival bid for the branches.

In the months following the failure of the Verde deal last year, the Co-op Bank discovered a £1.5bn capital hole and had to be rescued through a debt-for-equity swap that led to its bondholders taking control of the lender.

Last month, the Co-op Bank made a new £400m capital call after finding new problems largely relating to the mis-selling of financial products, including PPI and interest rate swaps.

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