KPMG, Market Watchdog Missed Co-Op Bank Shortfall, Report Finds

Oct. 23 (Bloomberg) — KPMG LLP and the U.K.’s markets regulator failed to spot a 1.5 billion-pound ($2.4 billion) shortfall at Co-Operative Bank Plc that derailed its plan to buy Lloyds Banking Group Plc branches, British lawmakers said.

While today’s 123-page report by Parliament’s Treasury Committee blamed the Financial Services Authority and the auditors for not uncovering the capital shortfall, it said the bank’s management was most at fault.

“Each of the backstops — Co-Op Bank itself, KPMG as its auditor and the FSA as its regulator — failed to uncover the bank’s capital shortfall until it was too late,” Andrew Tyrie, the committee chairman, said in a statement. “Each had a hand in this sorry tale. But by far the biggest responsibility lies with the Co-Op Bank leadership.”

Co-Op Bank abandoned its bid last year after it uncovered the gap, leading its parent company, Co-Operative Group Ltd., to cede control of the unit to creditors after 141 years. Three investigations by regulators and lawmakers are looking into what went wrong at the Manchester, England-based Co-Op Bank.

“We apologize for the extent of the failings of the past, Co-Op Bank Chief Executive Officer Niall Booker said in a statement. ‘‘But it is important to remember that the report is about just that -– the past rather than how the bank is managed and governed today.’’

‘Robust Audits’

KPMG denied it was at fault. ‘‘As the former auditor to the bank, we believe that we have provided robust audits which challenged the judgments and disclosures proposed by the bank’s management,’’ a KPMG spokeswoman in London said.

The Financial Conduct Authority, which replaced the FSA, didn’t respond to a request for comment.

Lloyds created and sold shares in TSB Banking Group Plc in an initial public offering in June to dispose of the branches it had planned to sell to Co-Op Bank. London-based Lloyds had to sell the outlets to meet European Union demands after it took state aid during the financial crisis.

Creating TSB and not selling the branches to Co-Op Bank may be a ‘‘setback for competition in the U.K. banking sector,’’ Tyrie said in the statement. TSB has a 4.2 percent share of Britain’s personal checking account market, below the almost 7 percent the sale to Co-Op Bank would have created, according to the report.

To contact the reporter on this story: Richard Partington in London at [e-mail] To contact the editors responsible for this story: Simone Meier at [e-mail] Steve Bailey, Jon Menon