Lloyds TSB is in advanced merger talks with beleaguered rival HBOS to create a UK retail banking giant worth £30bn, according to sources. HSBC has also shown interest in a potential takeover but is unwilling to pay for HBOS shares.
A deal would end uncertainty about the strength of the group, which includes the UK’s biggest mortgage lender Halifax and the Bank of Scotland.
Prime Minister Gordon Brown has been involved in the merger discussions and the government is understood to have said it would overrule any concerns competition authorities may raise.
Both the Financial Services Authority (FSA), the City watchdog, and the Treasury are reportedly encouraging a merger, which they believe would ease concerns over the health of the UK banking sector.
HBOS was created by the merger of the Halifax and Bank of Scotland in 2001. However, it has been hit by a weakening housing market and in recent days concerns have been raised about its exposure to the US sub-prime market and its ability to refinance its debt of more than £100m.
A merger would give Lloyds TSB access to a larger share of the UK mortgage market as well as give the enlarged bank more financial stability.