LONDON (Reuters) - The ex-chairman of banking start-up NBNK said he was told by former Bank of England Governor Mervyn King that state-backed Lloyds Banking Group's decision to sell hundreds of branches to the Co-op was politically motivated.
Peter Levene told parliament's Treasury Select Committee that King had informed him that NBNK's offer would not be accepted at a meeting in May 2012 - a month before Co-op was identified by Lloyds as preferred bidder.
"I was told by the Governor of the Bank of England that this was a political decision," he told the committee, which is examining the sale to see if there was undue political interference behind it.
The decision by Lloyds to favour Co-op prompted allegations that the coalition government, which had pledged to back customer-owned financial-services businesses as an alternative to mainstream banks, had encouraged the choice.
Levene said King told him that, regardless of the details of its bid, NBNK's offer would not be accepted. As a result, he said, the government had failed to ensure a new bank was created to challenge established banks.
When asked by the chairman of the committee, Andrew Tyrie, if he was alleging that Lloyds had acted in bad faith, Levene replied "yes". He told Tyrie, however, that he had no plans to take legal action and said later in the evidence session that he had "no hard evidence" to back up his claims.
Lloyds was ordered to sell the branches as a condition of a 45 billion-pound government rescue in 2008. It has denied being subject to political pressure and disputed suggestions of ministerial interference in the sale.
The sale collapsed last April when it emerged that Co-op needed to plug a 1.5 billion-pound capital hole at its banking arm. The full extent of its problems has subsequently emerged with the bank falling under the control of bondholders, including U.S. hedge funds, while its former chairman became embroiled in a drugs scandal.
Levene said he personally handed a document to Lloyds Chairman Win Bischoff which spelt out the risks of selling the branches to the Co-op. Lloyds has said it has "no record or recollection" of receiving that document.
"I gave the document to Sir Win. If he said I didn't give it to him that's untrue," Levene told the committee.
Britain's Conservative and Liberal Democrat parties pledged to promote mutuals to create a more competitive banking industry when they agreed to form a coalition government in 2010. The opposition Labour party has criticised their lack of progress, with leader Ed Miliband announcing plans to create two new challenger banks if his party wins the next election in 2015.
Following the collapse of the Co-op deal, Lloyds has rebranded the branches as TSB and spun them off into a separate entity which it intends to list on the stock market in 2014. In written evidence to the committee, Bischoff said the bank was engaged in "good discussions" with European regulators to enable it to do so.
Reporting by Matt Scuffham; Editing by Larry King