UPDATE 2-UK's Co-op Bank stops lending to new corporate clients
* Bank will continue lending to individuals
* Existing corporate customers are not affected by move
* Co-op is in talks with regulator on capital plans
* Moody's ratings downgrade prompted capital concerns
By Matt Scuffham
LONDON, May 24 (Reuters) - The Co-operative Bank has stopped offering loans to new business customers, part of measures designed to quell growing concerns over its capital position.
The bank's parent, the Co-operative Group, said on Friday it was undertaking an extensive review of the bank, examining its capital and lending position and its commercial strategy.
Credit ratings agency Moody's downgraded Co-op Bank's debt ratings earlier in May and warned it could need taxpayers' money to plug a capital shortfall which some analysts have said could be as high as 1.8 billion pounds ($2.7 billion).
In its statement, the Co-op said it took a decision in March that it would not look for new corporate lending business and would concentrate instead on serving individual retail customers.
"This decision is part of our commercial strategy to play to the traditional strengths of the bank. It will enable us to focus our energies and capital on both supporting our existing corporate customers and on growing our presence in the retail banking market," said new Chief Executive Euan Sutherland.
Sutherland, who only took up his position this month, has the task of convincing Britain's financial regulator that the bank's capital position is strong enough.
The financial regulator said in March that British banks must raise 25 billion pounds ($39 billion) of extra capital by the end of the year to absorb any future losses on loans.
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.
The bank, one of Britain's smaller lenders with 6.5 million customers and a 1.5 percent share of the current account market, is part of Co-op Group, Britain's biggest mutual business, which is owned by individuals and includes supermarkets, funeral services and pharmacies.
It is unclear whether funds from the wider Co-op Group will be used to support the bank. The group may consider hiving off its problem loans in a 'good bank/bad bank' split but a source familiar with the matter told Reuters that was not being proposed at present.
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.
State-backed Royal Bank of Scotland and Lloyds Banking Group have already agreed plans to shore up their capital. The regulator is expected to complete discussions with other banks, including the Co-op, by the end of June.
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