The Co-op Bank (Co-op) is facing a capital hole of up to £1bn according to a report from the Financial Services Authority (FSA).
The capital deficit at the Co-op is the first from regulators’ analysis of bank balance sheets after the Bank of England’s Financial Policy Committee revealed in November 2012 that the hole across the sector could be up to £50bn.
The FSA is expected to outline individual deficits in the coming weeks.
This puts Co-op’s plans to purchase over 600 of Lloyds’ branches under further pressure.
The deal faced has already faced challenges from a recent management reshuffle.
Earlier this month, the Co-op announced the departure of finance director James Mack, who has been working closely on the branch deal, while Co-op group chief executive Peter Marks is also set to retire by May.
If it goes through the deal would make the Co-op the UK’s sixth-largest bank by branches.
The two lenders are aiming to close the deal before the end of November 2013.
The Co-op group is planning to offload its non-life insurance business to Royal London as part of moves to address its deficit.
A Lloyds spokesman said: ‘We are continuing negotiations with Co-op and are making good progress in creating a stand-alone challenger bank.’