Lloyds raised Co-op capital concerns last year Lloyds Banking Group chief executive António Horta-Osório arrives at the Treasury select committee meeting. The former chief executive of the troubled Co-operative Bank, Neville Richardson, has quit the boards of M&S Bank and estate agency Countrywide in the wake of criticism of his tenure at the mutual. Richardson was the boss of Britannia building society when it merged with the Co-op Bank in a 2009 deal that is now facing scrutiny due to the bad debts it loaded on the Co-op. The bank has been downgraded to junk status and is raiding its bondholders to plug a £1.5bn shortfall. Richardson insisted that he wanted to correct "considerable inaccuracies" about his role in the Britannia deal and his departure from the Co-op Bank in 2011. Announcing the resignation of the non-executive directorships last night, he said: "Following the ill-informed and inaccurate commentary in the media concerning myself and my departure from the Co-operative Bank and the acquisition of Britannia Building Society by the Co-operative Group, this was the right thing to do. Richardson added that he would "welcome" the opportunity to assist any official enquiry into the Britannia merger or the events of two years ago. MPs were told yesterday that Lloyds Bank discovered an alarming shortfall in the Co-op Bank's capital position which made it unlikely the Co-op would ever be able to complete the purchase of 632 Lloyds branches. The discovery in December 2012 came five months before the shock Moody's report that downgraded the mutual's bonds and this week's £1.5bn rescue package. In evidence to the Treasury select committee, the Lloyds chief executive, António Horta-Osório, revealed that in December 2012 Co-op Bank privately handed Lloyds a revised projection of its future with the business it was planning to buy from Lloyds, and it became apparent that it did not have sufficient capital. "We had doubts about Co-op's capability in December 2012 when we were given the revised plan for the Co-operative Group," he said. From the combined plan for Co-op and TSB, our analysis was clear that there was a shortfall of capital. And that was when we had our first concerns about their ability to close the deal. On Monday Co-op Bank unveiled a £1.5bn rescue deal to plug a hole in its capital and stave off a taxpayer-funded bailout, which will see the bank's bondholders suffer deep losses. The recapitalisation came after Co-op Bank said in April that it was pulling out of the deal to buy the 632 Lloyds branches, which was swiftly followed by a six-notch downgrade of Co-op's bonds by the ratings agency Moody's. Moody's downgraded Co-op again on Tuesday, warning that "further burden sharing" may be required if the restructuring of the bank proves unsuccessful, and said bondholders may get as little as 35% of their initial investment back. It has also emerged that NBNK, the failed rival bidder for the Lloyds branches, warned the board of Lloyds in a letter in January 2012 that Co-op would not be able to finance a deal and that the "overstretch" would put Co-op's financial security and mutuality in jeopardy. Horta-Osório told MPs that Lloyds shared its concern about Co-op Bank with the regulator, then the Financial Services Authority, and demanded assurances from the mutual that it was still in a position to go ahead. We were told that Co-op Bank had several options that were meaningful, such as selling its asset management business. But we were concerned and we had doubts. We were reassured that they had options, but we were not totally reassured. From December Lloyds began to focus on plan B - the separate flotation of TSB as an independent bank - but the bank did not go public with its doubts about Co-op or pull out of the deal. Horta-Osório said Lloyds, since it was mandated by the EU to break up the bank, had in any case to press ahead with establishing a separate TSB entity, so gave Co-op the benefit of the doubt. We were surprised to see that there was suddenly a shortfall in capital [at Co-op]. But we had to go ahead and build a [separate] bank in any case," he said. Lloyds insists that at no time did it face political pressure to forge a deal with Co-op to boost the mutual sector. But Horta-Osório and the Lloyds chairman, Sir Win Bischoff, were repeatedly pressed by MPs on why it turned down the NBNK bid, which was worth £630m upfront compared with the £450m that Co-op was prepared to pay, plus a further £250m over time. Bischoff said: "The Co-op Bank was an established bank, it had a relationship with the FSA, staff, and ratings from two agencies. NBNK had none of these ... we gave them five opportunities to bid. We couldn't have done any more. Overall, the NBNK bid was slightly lower in capital terms. The letter that NBNK sent to the Lloyds board warned that Co-op could "overgear itself and leave it financially vulnerable" if it tried to buy the TSB business from Lloyds. It detailed concerns that IT systems at Co-op were "in disarray," that there were "continued delays" integrating Britannia Building Society and that the bank had a "weak capital structure." Bischoff confirmed that Lloyds received the letter but still felt at the time that Co-op represented the better bid. The failure of the Co-op deal may benefit the taxpayer owners of Lloyds, said Horta-Osório. The separate flotation of TSB will cost Lloyds £1.6bn, he said, but the improvement in equity markets since the deal with Co-op means the prospect for the flotation is now much better. The taxpayer might come out ahead.