According to reports, the merger will be made possible through a waiver of competition rules that would otherwise prevent one bank owning such a large market share.

A combination of HBOS and Lloyds TSB would control 28 per cent of the mortgage market and 24 per cent of savings and current accounts market. However, in the past such bids have been blocked as the Competition Commission decided it was unacceptable for one bank to have more than 25 per cent of the retail banking market.

The agreement will offer HBOS shareholders 0.83 Lloyds TSB shares for every 1 HBOS share, valuing HBOS at £12.2billion. Commenting on the acquisition, chairman of Lloyds TSB Sir Victor Blank said: “This will be a unique opportunity to accelerate and extend our strategy and create the UK’s leading financial services group.”

Chairman of HBOS, Dennis Stevenson added: “This is the right transaction for HBOS and its shareholders. Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector. In addition, the combined group will have excellent brands and a very powerful franchise. We are recommending our shareholders vote for this transaction.”

However, experts have warned that the takeover could result in expensive home loans and lowered savings rates as competition will be diminished. Commenting on the possible impact to the mortgage market, head of mortgages at moneysupermarket.com, Louise Cuming said: “Between the two giants of British Banking they control six major mortgage brands – Lloyds, Cheltenham & Gloucester, Halifax, Bank of Scotland, BM Solutions and Intelligent Finance.

“We need to wait and see how many of these survive the merger. Obviously if some of these disappear, customer choice and competition will be eroded, which will only be to the detriment of borrowers.”

The emergency takeover has been proposed as a reaction to the fall of HBOS following market uncertainty and the collapse of Lehman Brothers in the US. Shares in HBOS fell by more than 50 per cent in a day amid rumours it was struggling to cope as a result of its risky lending.

© Fair Investment Company Ltd