CO-OPERATIVE Bank has said it needs to find another £400 million by issuing new shares, after discovering more costs relating partly to past misconduct issues.

The move comes as former Bank of England Governor Lord King of Lothbury dismissed suggestions that he was aware of improper political interference in the decision by Lloyds Banking Group to sell branches to the Co-op.

The deal collapsed last year and was followed by the revelation that Co-op had what was estimated at the time as a £1.5bn capital shortfall.

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To fill this, Co-op Group arranged a refinancing in which control of the bank passed to a group of hedge funds, while retaining a 30% stake. This holding will reduce further unless the Co-op participates in the share sale.

The bank's problems were exacerbated when former chairman Paul Flowers was arrested as part of a police investigation into the supply of illegal drugs.

Co-op Bank, now headed by Scot Niall Booker, said a new review had shown it needed to set aside £400m to meet costs including compensation for mis-sold loan insurance, repayments to mortgage customers who were overcharged and compensation to small companies mis-sold hedging products.

Mr Booker said: "The result of providing for these items, together with the cost of separation from the Co-operative Group, is that the starting capital position of the bank for the four to five-year recovery period is weaker than in the plan announced last year."

The bank said it expected a pre-tax loss of between £1.2bn and £1.3bn for 2013.

In correspondence published yesterday former Bank of England Governor Lord King of Lothbury rejected a claim by Lord Levene of Portsoken, chairman of Co-op's rival NBNK, that he had been told by Lord King that there was political interference in the bidding process for the 631 Lloyds branches.

In a letter to Treasury committee chairman Andrew Tyrie, he said: "Although it seemed to me that the Government wished to ensure that, if it were possible, a plausible bid from the Co-operative Bank was able to be considered alongside other bids, that was a far cry from any improper conduct in the bidding process."

Meanwhile, Lloyds has revealed that it has handed chief executive Antonio Horta-Osorio a long-term share award with a paper value of £3.7m at prevailing prices.

The proportion of the 4.6 million shares given to Mr Horta-Osorio under the three-year scheme will depend on meeting performance conditions.