UK banking giant Lloyds TSB today announced a £12.2bn (€15.5bn) takeover of rival Halifax Bank of Scotland.
Yesterday HBOS, whose share price plunged by as much as 70% this week amid funding worries, confirmed it was in “advanced talks” over a merger that would create a £30bn (€38bn) banking giant with nearly a third of the UK mortgage market.
The British government are thought to have waived competition rules to get the transaction through, and it reportedly follows talks between Lloyds TSB chairman Victor Blank and British Prime Minister Gordon Brown. The UK Treasury and the Financial Services Authority (FSA) were been involved.
The merger is the latest dramatic episode this week which has already seen the collapse of 158-year-old investment bank Lehman Brothers and the $85bn (€59bn) bail-out of US insurance giant AIG.
Central banks around the world have pumped tens of billions of euro into money markets to try to ease nerves.
London’s leading share index fell nearly 4% on Monday and Tuesday, while another 2% was lost yesterday after poor US housing figures and continued worries over the health of investment banks.
It was a similar story on Ireland's ISEQ index.
In the US, the Dow Jones industrial average dropped about 450 points.
Experts said investors were concerned that AIG was not able to find a lifeline in the private sector and Wall Street was worried about what could happen next.
HBOS is the UK’s biggest mortgage lender and savings bank, with an estimated 20% share of the mortgage market at the end of last year and 22 million customers.
Lloyds TSB, which does the bulk of its mortgage lending under its Cheltenham & Gloucester brand, is the UK’s third biggest lender in terms of outstanding home loans. At the end of June it had 9% of the UK mortgage market.
The company is also the UK’s third biggest savings bank, with £65bn (€82bn) saved through it and Cheltenham & Gloucester, the country’s biggest current account provider.
Without any government intervention, competition chiefs could raise concerns over the enlarged group’s dominant market positions.
Lloyds has been actively looking for acquisitions this year. In June, it was reportedly working on plans to buy Germany’s Dresdner Bank from insurance giant Allianz.
The group has seen much less impact from the global credit crisis than its UK rivals, posting a £585m (€743m) credit crunch hit for the first half of this year compared with £1bn (€1.3bn) for HBOS and £2bn (€2.5bn) for Barclays.
Shares in HBOS – which was formed in 2001 from the merger of Halifax and Bank of Scotland – slumped over the past three days on fears over its funding position.
At one point yesterday, before the merger speculation broke, the group’s share price was 50% lower at 88p, less than a third of the value first thing on Monday morning.
Analysts have said HBOS needs to refinance more than £100bn (€127bn) of funding during the coming months, which could be more challenging after the blow to confidence from Lehman’s demise.
There were also suspicions that HBOS might have been a victim of “short-selling”, where investors make money by effectively betting on the price of a company falling.