Lloyds will now consider talks with rival suitors including banking venture NBNK which submitted a fresh bid proposal for the branches earlier this month.
Last month, the chief executive of the Co-operative Group, Peter Marks, said the deal to buy the bank branches “may not go ahead”.
He said: “There are significant economic and regulatory issues that we have to address and that's what we're working towards.”
Lloyds which is 40% owned by the government has been given a November 2013 deadline to complete the sale in order to meet European Commission competition rules.
The sale of the branches has been named Project Verde.
In a statement Lloyds said: “The group continues to have productive and meaningful discussions with the Co-operative Group, its preferred buyer for the Verde business. However LBG is no longer holding these discussions under an exclusivity agreement.
“Given the renewed interest in the Verde business shown by NBNK, LBG will now consider detailed discussions with other parties but only once LBG is satisfied that any proposal is likely to achieve the appropriate regulatory clearances and offers greater value and/or certainty to LBG shareholders against its alternative option of an Initial Public Offering."
NBNK earlier this month tabled a big with an “alternative demerger structure” where it would underwrite 100% of the package of branches being sold by Lloyds leaving Lloyds shareholders, including taxpayers, the option of receiving cash directly and/or receiving shares in a new, listed banking group.
Lord Levene, chairman of NBNK, said: “NBNK offers none of the downsides to Lloyds of a standalone IPO. We have the right board, management, strategy and experience to run and grow a large scale banking operation and achieve our plans for Verde. Our shareholders are strongly supportive of our objectives.”
The Treasury hopes that a significantly enlarged Co-op will provide increase competition to the high street banks.
The Financial Services Authority however has told the Co-op that if it was to go ahead with the deal, the regulatory consequences would mean that the Co-op would have to change its corporate structure and governance, and dedicate more capital to banking to protect depositors from losses.
The Co-op Group as a whole would be categorised by the FSA as a financial institution, as opposed to the general conglomerate it is today.
As a financial institution it would therefore have to put in place new formal arrangements giving explicit priority to its banking operation in the allocation of management and financial resources.
The structure of the group would shift from the democratically-elected group board to bankers and financial experts, and the group chief executive would have to be a banker which the incumbent, Peter Marks, is not.
