George Osborne defends Treasury's role in Co-op bid for Lloyds branches

George Osborne has defended the government's role in the doomed Co-op Bank takeover of 630 Lloyds branches, insisting "the system worked" and that regulators spotted the Co-op's frailty before the deal went ahead.

The Treasury was in regular contact with the Co-op as it prepared to buy the branches and Labour has claimed that Mr Osborne, the chancellor, should have realised at a much earlier stage that the deal was unviable.

The stakes have been raised by claims from Lord Levene, a City grandee and rival bidder for the Lloyds branches, that the deal was a political stitch-up because the Treasury wanted the Co-op to expand its presence on the high street.

Andrew Tyrie, chairman of the Commons Treasury committee, said Lord Levene would be called to give evidence to his inquiry into the abortive Lloyds/Co-op deal to substantiate his claims of Treasury interference.

At the weekend Lord Levene said he was told by Lord King, the former Bank of England governor, that his NBNK bid for the Lloyds branches would fail "because a political decision had been made to favour the Co-op".

But Mr Osborne said suggestions that the Treasury was backing the Co-op were beside the point. "The key point is this: it didn't happen - in other words, the system worked," he told the BBC Radio 4's Today programme.

"The system worked because when we saw the Co-op was in no fit state to take over the Lloyds branches, the alarm bell rang, the alarm bell was heard."

The chancellor argues that the near-collapse of the Co-op bank with a £1.5bn capital hole - and the allegations around its former chairman Paul Flowers - pose questions for Labour, which has close financial and historical links with the Co-op.

He has ordered an inquiry into what happened at the bank and the role of the regulator and government in the Co-op's ill-fated merger with the Britannia in 2009 - which happened on Labour's watch - and the bid for the Lloyds branches, which collapsed earlier this year.

Mr Tyrie said he was surprised at suggestions that ministers might not be called to give evidence to the inquiry - to be led by an independent figure - and that he "could not see" any grounds to exclude ministers from cross-examination.

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