Britannia Building Society would have failed if it had not been for the takeover of the lender by the Co-operative Bank in 2009, Britain’s top bank supervisor told the Treasury select committee.

Andrew Bailey, the head of the Prudential Regulation Authority, said the purchase of Britannia had taken the struggling lender “out of the limelight” during a dangerously febrile time for Britain’s financial system, but that it failed to resolve the underlying problems in the company’s tattered balance sheet.

The purchase played a central part in opening up the capital hole that subsequently upended the Co-op Bank, Mr Bailey said in testimony to the select committee.

The regulator said he put the Co-op Bank’s management “on notice” about problems in their company’s capital position in 2011 and raised concerns about the bank’s ability to pull off the mooted acquisition of 600 branches from Lloyds Banking Group.

Mr Bailey said the Co-op had communicated those concerns to Lloyds at the end of 2011. He expressed surprise that Sir Win Bischoff, the Lloyds chairman, had testified that he did not know about the capital concerns at that time.

A person close to Lloyds said that the bank only became aware of capital issues at the lender a year later and that the communication in 2011 had not flagged up a capital black hole.

The Co-op Bank, which was forced to launch a £1.5bn recapitalisation to shore up its finances at the end of 2013, is 70 per cent owned by bondholders, including several US hedge funds. The bank’s problems were exacerbated after former chairman Paul Flowers was arrested at the end of last year after becoming embroiled in a drugs scandal.

The regulator described Mr Flowers as “pompous” but well briefed. Mr Bailey said he had not come under any political pressure to favour the Co-op bid for the Lloyds branches.

However, he noted that there had been “strong statements” from senior politicians suggesting that they endorsed the purchase.

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