Britain's eight biggest lenders are being tested on their ability to withstand a theoretical 35 percent crash in house prices and surging unemployment and interest rates, with the Bank of England due to announce the results on Dec. 16.

"It will come as no surprise if the bank does not meet the desired capital ratios in the stress tests," Chief Executive Niall Booker said in a statement.

"Almost 70 per cent of our customer assets are residential mortgages and it has always been clear to ourselves and the regulator that we are vulnerable to these tests at this point in our turnaround."

Co-op Bank nearly collapsed last year and fell under the control of bondholders after a 1.5 billion pound ($2.36 billion) capital shortfall was identified.

Industry sources told Reuters that Co-op Bank executives are hopeful the lender will be able to convince regulators that it can address concerns by tweaking its existing recovery plan rather than tapping shareholders for extra capital on top of the 1.9 billion pounds it has raised in the past 12 months.

In August the bank said that it expected to hold sufficient capital to meet a mild downturn in the British economy, such as that typically experienced once every 10 years, but not enough to weather the severe type of slump the Bank of England is testing against. Under that scenario, it said its core capital would fall below the 4.5 percent minimum demanded by the regulator.

Co-op Bank said on Monday that it had raised 157.5 million pounds by selling its Illius Properties business to Salmon Real Estate as part of its plan to sell non-core assets and bolster capital. Illius buys repossessed properties with the intention of selling them on at a profit.

The Co-operative Group, which used to own the bank outright, saw its stake drop to 20 percent after last year's restructuring.

(Editing by David Goodman)

By Matt Scuffham