REFILE-UPDATE 3-Co-op Bank rules out UK state help after capital warning
* Bank head quits after Moody's downgrades debt ratings
* Moody's says bank could require government support
* Co-op acknowledges need to bolster finances
* Barry Tootell steps down as CEO of Co-op Bank
* Rod Bulmer temporary replacement
By Matt Scuffham
LONDON, May 10 (Reuters) - The Co-operative Bank ruled out government support on Friday, after a warning from ratings agency Moody's that it might need taxpayers' money to plug a capital shortfall prompted its chief executive to resign.
Speculation about Co-op Bank's weak capital position has grown since it pulled out of a deal to buy 630 branches from Lloyds Banking Group last month.
The bank, one of Britain's smaller lenders with 6.5 million customers and a 1.5 percent share of the current account market, said it did not need a bailout.
"We would like to reassure customers and members that we haven't sought nor do we need government support," the Co-op said.
The bank is part of Co-op Group, Britain's biggest mutual business, which is owned by individuals and includes supermarkets, funeral services and pharmacies.
Britain spent a total 124 billion pounds bailing out Royal Bank of Scotland, Lloyds Banking Group, Northern Rock and Bradford & Bingley during the 2008 financial crisis, according to the independent National Audit Office.
The financial regulator said in March that UK banks must raise 25 billion pounds ($39 billion) of extra capital by the end of the year to absorb any future losses on loans.
Industry sources have told Reuters that the Co-op's shortfall could be in the region of 700 million pounds ($1.1 billion) to 750 million pounds.
The Co-op said Barry Tootell would step down as chief executive of its bank and that Rod Bulmer, who has held a number of senior positions at the bank, would step into the role until a permanent replacement is found.
A source familiar with the situation said Tootell had planned to leave following the collapse of the Lloyds deal, but the Moody's report accelerated the process.
Moody's said late on Thursday the bank faced the risk of substantial losses in its non-core portfolio - loans the bank has identified as risky - and the low level of funds it had set aside to deal with them left it vulnerable to losses.
The agency said there was "moderate potential for systemic support likely to be forthcoming from the UK authorities," to maintain regulatory capital levels.
That support could also come from the Co-op Group itself, which has gross assets in non-financial operations of 6.3 billion pounds and net equity of 4.5 billion pounds.
Moody's lowered the deposit and senior debt ratings of the bank and placed it under review for further downgrades.
The agency said the Co-op bank's capital levels were low compared with peers. Co-op's core tier one capital ratio was 6.3 percent at the end of 2012, assuming the full implementation of tougher global rules that are being phased in. Britain's regulator wants banks to hold at least 7 percent.
Moody's said most of the risk on the Co-op's books stems from loans it took on via its acquisition of the Britannia Building Society in 2009.
The downgrade hit Co-op Bank's preference shares, which were trading down 24 percent at 1442 GMT while spreads on the bank's subordinated and covered bonds widened.
Co-op said it would drive through plans to improve its capital position in the coming months.
The mutual said in March that it would sell its general insurance arm to bolster its finances. Analysts have said that business could fetch as much as 600 million pounds.
It has also agreed to sell its life insurance business to Royal London Mutual Insurance for 220 million pounds.
Britain's Finance Minister George Osborne told reporters on Friday that Co-op's plans to strengthen its capital position would be supervised by the regulator. The Prudential Regulation Authority (PRA) declined to comment.
Tootell's departure from Co-op Bank follows that of James Mack, who stepped down as its finance chief in February and leaves the bank with no permanent chief executive or finance director. The bank made a loss of 674 million pounds last year, hit by bad loans.
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