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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
* KPMG says it provided robust audits of the bank
* Co-op Bank says significant progress made in last year (Recasts, adds comment from several parties)
By Matt Scuffham
LONDON, Oct 23 (Reuters) - The former bosses of Britain'sCo-operative Bank are to blame for the lender'snear-demise last year, a committee of lawmakers said, in areport which also questioned the role played by regulators andauditors KPMG.
The 123-page report from the UK parliament's Treasury SelectCommittee examined the Co-op bank's aborted attempt to buyhundreds of branches from Lloyds Banking Group lastyear. It found that the attempted purchase, which preceded acrisis at the lender, had not been pushed by politicians.
The report pointed instead to failings within the bankitself, including a governance structure which, it said, wasuntil last year "entirely inadequate for a bank of any size".
The Co-op bank fell under the control of bondholders lastyear when a 1.5 billion pound ($2.4 billion) capital shortfallwas identified, shortly after its attempt to buy the 631branches from Lloyds collapsed.
"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," the committee'schairman Andrew Tyrie, a Conservative lawmaker, said.
"Each had a hand in this sorry tale. But by far the biggestresponsibility lies with the Co-op Bank's leadership."
The lender, which has 4.7 million customers, hit troubleafter racking up big losses on commercial property, much ofwhich was acquired through its 2009 takeover of the BritanniaBuilding Society.
The Treasury committee recommended that investigations intoCo-op Bank's failings by Britain's finance ministry and theFinancial Reporting Council (FRC) should focus on the role ofCo-op Bank's auditor, KPMG, and Britain's financial regulator.
Tyrie said the FRC's investigation should focus on why toxicassets sitting on the bank's books were not discovered earlier.
"Co-op Bank's huge losses on the Britannia assets remaineduncovered for years despite numerous audits by KPMG. The FRC'sinvestigation needs to find out how something so important cameto be overlooked," he said.
KPMG said in response that it was co-operating fully withthe FRC's investigation.
"As the former auditor to the bank, we believe that we haveprovided robust audits which challenged the judgements anddisclosures proposed by the bank's management," KPMG said.
The FRC said it would take into consideration the pointsraised in the committee's report.
"INADEQUATE" GOVERNANCE
The committee, which is charged with overseeing Britain'sfinance ministry, said the biggest responsibility for the bank'sproblems lay with its leadership.
It said the corporate governance structure was inadequate,with a board dominated by members from its parent, theCo-operative Group, who lacked financial services experience.
The bank suffered embarrassment last year when its formerchairman Paul Flowers, a former Methodist minister and localcouncillor, pleaded guilty to possessing illegal drugs.
Co-op Bank said in response to the report that it had madesignificant progress towards reform over the past year.
"The bank's board looks very different today and is nowmanaged and governed independently to the group," it said.
The Financial Conduct Authority, which replaced the FSA inApril last year as financial regulator and is conducting its owninvestigation into the problems at the bank, said it wouldconsider the committee's recommendations.
The committee's report found there was no political meddlingin the failed sale of Lloyds branches to the Co-op, despiteallegations made by the former head of a rival bidder. But itsaid Britain may have missed out on an opportunity to build itssought-after "challenger" bank.
Lloyds was ordered to sell the branches by Europeancompetition regulators as a condition for approving its 20.5billion-pound government bailout in the financial crisis.
The sale was supposed to create a viable rival for Britain's'big 4' banks - Lloyds Banking Group, Royal Bank ofScotland, HSBC and Barclays - andTyrie said the collapse of the deal in April last year had anegative effect on banking competition in Britain.
Lloyds subsequently rebranded the branches as TSB and listedthe business. TSB has a 4.2 percent share of the UK personalcurrent account market, compared with the 7 percent which acombination of Co-op and the Lloyds branches would have had.
"There is a risk that a bank of this size might struggle togrow significantly and act as a true challenger in the market,"Tyrie said. (Additional reporting by Huw Jones; Editing by Clara FerreiraMarques)
