The former Co-op Bank chief executive Neville Richardson flatly denied that its merger with Britannia Building Society had caused its financial problems yesterday, directly contradicting evidence given by Andrew Bailey, the head of the Bank of England's Prudential Regulation Authority.
Mr Richardson told the Treasury Select Committee that he had warned directors of Co-operative Group that a plan to merge with Lloyds Banking Group's Verde would be "a disaster".
His testimony is set to ratchet up the controversy over the £1.5bn recapitalisation of the Co-op that will see the group injecting £1bn and bondholders a further £500m, wiping out much of the value of their holdings when they get shares instead.
A spokesman for the Bank of England said the Co-op's recent results "clearly showed" that the majority of the bank's impairments were down to Britannia's loan book, and that the Bank "strongly disagreed" with Mr Richardson.
Andrew Tyrie, the committee's chairman, said: "There appears to be a yawning gulf between the evidence the committee heard today from Mr Richardson and the evidence we heard previously from Mr Bailey. The committee will be investigating this a good deal further."
MPs are likely to recall Mr Bailey and Mr Richardson. An unrepentant Mr Richardson said: "Britannia was a good a strong business. After (merging with Co-op) no unexpected issues arose. Accounts were audited, boards were carrying out governance and no issues arose, so something different happened." He flatly denied that subprime loans sourced from General Motors, which hastened the collapse of Bradford & Bingley, had led to problems at Britannia, arguing that Britannia bought the loans under very different terms that allowed his team to reject any which went wrong.
Despite being accused by MPs of "ducking and diving", he blamed the Bank for taking a tough new approach towards provisioning against risky loans for tipping the bank into a £1.5bn capital hole, saying there were no problems with it under his management.
Mr Richardson insisted he left the business "in good shape" and said the loan book of Britannia wasn't in any serious difficulties when he departed. He said his warning that the plan to bid for more than 600 Lloyds Banking Group branches would lead to a "disaster" prompted his departure from the bank "by mutual agreement". He said he raised the issue in a meeting with Co-operative Group chairman Len Wardle, deputy chairman Paul Flowers, who was the chairman of Co-op Bank, and chief executive at the time Peter Marks, who he described as "very keen" on the deal.
He blamed them for pushing ahead with a restructuring called Project Unity, which had led to many Co-op bankers being forced to reapply for the jobs and would have left bankers reporting to retailers. "Five of the eight executive team left, and something like 15 of the 30 below. That is an awful lot of experience," he said.
Mr Richardson, on a £4.6m package when he left, argued that Co-op was already going through two other major change programmes, with a shake-up of its IT and sale of its insurance businesses. The bank lost more than £700m in the first half of this year.