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* No evidence of political interference in branch sale -MPs
* MPs call for role of KPMG, regulator to be examined
* MPs say Co-op Bank's past leadership to blame for problems
* Lloyds says findings vindicate its position
* Co-op Bank says significant progress made in last year
By Matt Scuffham
LONDON, Oct 23 (Reuters) - Lloyds Banking Group's aborted attempt to sell hundreds of branches to the Co-operativeBank was not influenced by politicians, a committeeof lawmakers said on Wednesday.
The sale collapsed in April last year and the full scale ofCo-op Bank's problems later became apparent when a 1.5billion-pound capital shortfall was exposed and it was forcedinto a restructuring which saw it fall under the control ofbondholders, including U.S. hedge funds.
Parliament's Treasury Select Committee, which examines thework of Britain's finance ministry, has conducted an inquiryinto whether undue political pressure was applied to Lloyds tosell the 631 branches to the Co-op.
Britain's Conservative and Liberal Democrat parties pledgedto promote mutuals to create a more competitive banking industrywhen they agreed to form a coalition government while theopposition Labour party has strong links to the Co-operativeGroup, from which it has received donations.
Lloyds was ordered to sell the branches, code named Verde,by European competition regulators as a condition for approvingits 20.5 billion-pound ($34 billion) government bailout in thefinancial crisis.
Peter Levene, the ex-chairman of rival bidder NBNK, told thecommittee that former Bank of England Governor Mervyn Kinginformed him that Lloyds' decision to sell to the Co-op waspolitically motivated.
But the committee said in a report on the matter that it hadfound little evidence to back up Levene's claim.
"The committee has seen scarcely any evidence in support ofthis claim. The allegation was rejected by every other witnesswho appeared before the committee," the committee's chairmanAndrew Tyrie, a Conservative lawmaker, said on Wednesday.
Tyrie added the committee had not seen evidence thatanything other than Lloyds' commercial objectives determined itsdecision, he said.
"It seems improbable that any such political interferencecould have been concealed by so many people and for so long. Thegovernment publicly stated its support for Co-op's bid, but thecommittee has not seen anything to suggest that this constitutedimproper pressure or bad faith on anyone's part," he said.
Lloyds, which has consistently denied that politicalpressure was applied, said its position was vindicated by thecommittee's findings.
"The Treasury Select Committee report clearly concludes thatthere was no political interference during the negotiations withthe Co-op," it said.
Lloyds subsequently re-branded the branches as TSB andfloated the business on the London Stock Exchange.
Co-op Bank, which has 4.7 million customers, hit troubleafter racking up big losses on commercial property, many ofwhich were acquired through its 2009 takeover of the BritanniaBuilding Society.
The Treasury committee recommended that an investigationinto Co-op Bank's failings that has been commissioned byBritain's finance ministry and an investigation by Britain'sFinancial Reporting Council should focus on the role of Co-opBank's auditor, KPMG, and Britain's financial regulator.
"Each of the backstops -- Co-op Bank itself, KPMG as itsauditor, and the FSA as its regulator -- failed to uncover thebank's capital shortfall until it was too late," Tyrie said.
The committee said the biggest responsibility for the bank'sproblems lay with the bank's leadership. It said the bank'scorporate governance structure up until the middle of last yearwas "entirely inadequate for a bank of any size".
The committee said the bank's board was dominated by membersfrom its parent, the Co-operative Group, who lacked financialservices experience. The bank suffered embarrassment last yearwhen its former chairman Paul Flowers, a former Methodistminister, pleaded guilty to possessing illegal drugs.
Co-op Bank said in response that it had made significantprogress towards reform over the past year.
"The bank's board looks very different today and is nowmanaged and governed independently to the group. There is anentirely new executive team with the depth of financial servicesexpertise to turn the bank around," it said.
($1 = 0.6233 British pound) (Reporting by Matt Scuffham, editing by David Evans)
