The Co-operative Bank is reportedly facing a potential £1bn capital hole in a further blow to its deal to buy more than 600 branches from Lloyds Banking Group.
The Financial Services Authority (FSA) identified the deficit in the Co-op's capital reserves as part of an industry-wide assessment after last November's warning from the Bank of England over a £50bn shortfall in the sector, according to the Financial Times.
It is understood the Co-op is considering a range of asset sales – including its non-life insurance business – to boost its capital strength.
The group is offloading its life assurance business to Royal London, which should free up around £200m.
But there are concerns the capital gap will put further pressure on its Lloyds branch acquisition, which is already thought to be hampered by difficulties including recent management upheaval.
The Co-op is said to be considering bringing in a partner to join the Lloyds deal, as its status as a mutual means it has limited routes to boost capital.