Osborne’s banking shake-up in crisis

■ Co-op blames stifling regulations as it pulls out of Lloyds branch bid

■ City grandees call for inquiry into why their bid was snubbed

■ Critics slam funding for lending scheme after government extension

FAILED bidders for Lloyds’ 623 branches yesterday called on MPs to hold an inquiry to find out why the Co-operative was ever offered the unit, arguing a rival bid would have paid more and could have finished the deal faster.

The deal’s collapse leaves the chancellor’s plan to boost banking competition in tatters as the Lloyds and RBS spin-offs are too small to affect the sector as standalone banks, analysts fear.

And the government’s latest effort to kick-start the economy by pumping more cheap cash into banks was met with warnings it can only have a very limited impact, rather than getting the UK out of its slump.

The Co-op had been set to pay £350m for Lloyds’ branches up front, and up to £400m more based on performance.

The branches have to be sold as a condition of the bank’s bailout. But the deal fell through yesterday, with the Co-op blaming the rising costs of bank regulation and the weak economy.

However, sources close to the deal believe the Co-op had bitten off more than it could chew, leaving it struggling to come up with the funds and suffering IT integration problems.

Rival bidders said the deal should never have been given the go-ahead.

“We bid more than the Co-op, £800m to £850m with most of the money upfront. There was money on the table but the $64,000 question is why was it rejected. What was Lloyds thinking?”, Lord Levene, boss of investment firm NBNK which he set up to buy banking divestments, told City A.M. “This is the government’s money we are talking about here. The Treasury Select Committee or the banking commission should look at what happened.”

But insiders rejected Levene’s points, disputing his figures and claiming a successful Co-op deal would have given the better result for the taxpayer.

Lloyds will now float the branches, creating a standalone TSB Bank. The brand will be up and running this summer, headed by Paul Pester. But it is unlikely to be sold by the EU’s November deadline and so the bank will have to apply for an extension.

The Co-op deal would have given the group a significant share of the market at seven per cent, but analysts believe the standalone entity will not seriously challenge the big banks.

“It will not be transformative from an industry or consumer point of view,” said Investec’s Ian Gordon. “It will not be like pre-2007 when there was price-driven competition from Northern Rock and the Halifax.”

Meanwhile the Bank of England boosted its funding for lending scheme, extending it for a year and giving incentives to lend to SMEs.

But analysts said it will not work.

“The extension is no game changer,” said Nomura’s Philip Rush. “The Bank is pushing for banks to raise new capital so that they can increase the size of their loan books and still meet capital requirements. But this does not make commercial sense, so banks remain set to meet their targets through retained earnings and next to no loan growth.”