* Sale of branches to Co-op supposed to create challenger
* Lloyds chairman, CEO to face lawmakers on June 18
* FPC's Haldane says PRA working with Co-op's new management
By Matt Scuffham
LONDON, June 12 (Reuters) - Lloyds Banking Group Plc's top executives will appear before British lawmakersnext Tuesday to answer questions over the collapse of a plannedsale of hundreds of branches to the Co-operative Group.
Chief Executive Antonio Horta-Osorio and Chairman WinBischoff will answer questions from the Treasury SelectCommittee (TSC) about why the deal, which would have created achallenger to Britain's dominant lenders, fell through afterlengthy negotiations.
Since the talks ended in April, the financial health of theCo-operative Bank has come under scrutiny, withrating agency Moody's downgrading its credit rating to "junk"status and warning it might need taxpayer support - somethingthe bank has denied.
Industry and political sources said lawmakers want to get tothe bottom of why the talks were allowed to proceed for so longat a time when Co-op Bank's capital position was so precarious.Industry sources say the bank is facing a capital shortfall ofup to 1 billion pounds ($1.6 billion).
There had been strong cross-party political support for theCo-op to play a bigger role in UK banking because of the firm'sethical credentials. The Co-operative is Britain's biggestmutual business, owned not by private shareholders, but by morethan 6 million individuals.
Industry sources had expressed doubt about the deal'sviability for several months prior to it collapsing, mainlyciting concerns over how the Co-op would meet regulatory capitalrequirements.
Co-op's new Chief Executive Euan Sutherland has overhauledthe group's senior management in recent weeks, appointing agroup finance director and a chairman and chief executive atCo-op Bank.
Andy Haldane, a member of the Bank of England's FinancialPolicy Committee (FPC), on Tuesday told the TSC, which overseesthe work of Britain's finance ministry, that the Moody'sdowngrade of Co-op Bank had been "a surprise to almosteveryone".
"It's clear that further needs to be done to put Co-op intoa situation of resilience and sustainability and my colleaguesat the PRA (Prudential Regulation Authority) are working closelywith Co-op's new management on just that," he said, referring toanother part of Britain's financial regulatory setup.