* Bailey "surprised" by Bischoff evidence to lawmakers
* Bailey says Co-op concerns passed to Lloyds in 2011
* MPs probing collapse of Lloyds branch sale to Co-op
By Matt Scuffham and Freya Berry
LONDON, Feb 11 (Reuters) - One of Britain's senior financialregulators said he was surprised that the chairman of LloydsBank did not know of concerns raised in December 2011about a planned sale of Lloyds' branches to the Co-op Bank.
Andrew Bailey told parliament's Treasury Select Committee onTuesday that the Co-op had informed Lloyds in December 2011 ofthe regulator's concerns about the sale. Lloyds executives hadtold the committee last July they were not aware of a problemwith the Co-op's capital strength until a year later.
Bailey, the Bank of England's deputy governor for financialstability, cited a letter he sent to Co-op Bank's Chairman PaulFlowers in December 2011, which questioned whether Co-op had a"feasible and sustainable capital plan".
Bailey said he had instructed Co-op executives to informLloyds of his concerns and had evidence that they had done so.
"I have to say to you what was a surprise in your hearingwas that (Lloyds chairman) Win Bischoff didn't know. When Iheard about your hearing I said 'well that's odd' and that'sobviously an issue within Lloyds," Bailey told the committee.
Lloyds declined to comment on Tuesday.
Lloyds, 33 percent-owned by the government, was ordered tosell 631 branches by European regulators as a condition of its20 billion pound ($32 billion) bailout following the 2008financial crisis. The committee is examining whether there wasundue political interference in the sale process.
Lloyds' decision to sell the branches to the Co-op hadsupport among lawmakers within the Conservative-led coalitiongovernment, which is committed to supporting customer-ownedlenders. The deal was supposed to create an alternative toBritain's established banks but collapsed last April.
Three months later, a 1.5 billion pound capital shortfallwas uncovered at Co-op Bank, which subsequently fell under thecontrol of bondholders including U.S. hedge funds. The bank'sproblems were exacerbated when Flowers was arrested in Novemberafter becoming embroiled in a drugs scandal.
The regulator has been criticised for approving theappointment of Flowers, who had virtually no banking experience,as chairman in 2010. Bailey said he had found Flowers to be"pompous" in their meetings but added he was "well briefed" and"didn't display ignorance."
He said the appointment would not be approved now as theregulator is insisting bank chairman have significant financialservices experience. But Bailey also acknowledged that thetougher criteria is making it harder to fill senior positionswithin banks.
"We do have to watch that we don't create a regime wherethese jobs are so unpopular that no right-minded person would dothem," he said.
Bailey told the committee that most of the problems at Co-opBank stretched back to its 2009 takeover of the BritanniaBuilding Society, which saddled it with a portfolio of souringproperty loans. He said that Britannia would have required arescue had it not been acquired by Co-op.
"My view at the time was ... it would have failed," he said.
Lloyds (LLOY)