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Lloyds Banking Group PLC (LYG) is moving a step closer to sell 632 branches to the Co-operative Group after the two groups have come up with a new so-called "hybrid" proposal to the Financial Services Authority, the Sunday Telegraph reports.

Under the proposal, the report says Co-op will buy Lloyds' so-called Project Verde branches "through a quasi-reverse takeover process of the Co-op Bank."

The proposal is intended to assuage the FSA's questions over management capabilities and governance at the Co-op, as well as questions about its systems expertise, the report says.

It says Project Verde's interim management team, led by Paul Pester, will transfer with his business to Co-op and run Co-op's enlarged banking business. However, the Verde branches won't be removed from Lloyds' technology platforms, and will instead be reliant on Lloyds' for its operational capabilities.

Mark Fisher, Lloyds' group operations director who is heavily involved in the bank's restructuring, will be central to the project, essentially overseeing the hybrid unit, the paper says.

A Lloyds spokeswoman declined to confirm the report, but said the bank is still in talks with Co-op and is reviewing a bid for the Verde branches from NBNK PLC (NBNK.LN).

Newspaper website: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9262279/Lloyds-nears-deal-to-sell-branches-to-the-Co-op.html

-London Bureau, Dow Jones Newswires; +44 (0)20 7842 9320

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