The credit crisis claimed another casualty when Lloyds TSB PLC announced a STG12 billion ($A27.6 billion) deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
HBOS is also owner of major British banks including Halifax and the Bank of Scotland.
The combined retail bank will account for 28 per cent of the UK mortgage market and STG400 billion ($A920 billion) in savings deposits, about half of the savings market.
It will be the largest financial services group in everything from mortgages and current accounts to savings and personal loans.
Its formation was only possible, Lloyds chairman Victor Blank told journalists on Thursday, because Prime Minister Gordon Brown personally told him the government would facilitate the deal by overriding anti-monopoly regulations.
"The transaction could only happen if the government would give its support," said Blank, explaining that Lloyds had been talking with HBOS about a possible bid since the end of August.
"On Monday evening, the prime minister said to me that the government would give that support."
At that point, early takeover discussions between Lloyds chief executive Eric Daniels and HBOS chief executive Andy Hornby, which began with a drink six weeks ago, quickly accelerated.
By Wednesday night a deal had been struck.
The timing of Brown's stamp of approval was no surprise. On Monday morning, the global credit crisis took down US investment bank Lehman Brothers, which went bankrupt, and Merrill Lynch, which was sold to Bank of America, while insurance giant AIG needed a massive emergency loan from the US Federal Reserve.
Following the turmoil on Wall Street, investors became increasingly worried that HBOS' wholesale funding model was unsustainable in the current credit environment.
Intense selling pressure on HBOS shares caused them to fall by 48 per cent between Monday and Wednesday to 147.10 pence, a fifth of their value at the start of the year.
Brown said on Thursday: "I believe we have taken not only the right action, but by taking the action, we have brought more stability to the financial system."
The deal has supported HBOS' shares, which regained much of the week's volatile losses after the deal was announced.
The stock price rose by 34 per cent to 197 pence. Shares in Lloyds fell 7 per cent on the London Stock Exchange to 261 pence.
The all-shares takeover deal will give HBOS shareholders 0.83 shares in Lloyds for every HBOS share. Existing Lloyds shareholders will hold 56 per cent of the combined company.
The takeover valuation is based on Lloyds' closing share price of 279.75 pence on Wednesday.
Lloyds said the deal should save the combined companies "significantly" more than $US1 billion ($A1.27 billion) a year by 2011, and that management will focus on preserving jobs in Scotland, where HBOS is headquartered.
The deal will lead to an unspecified number of job losses, as Lloyds combines the two banks' IT platforms and 3,300 premises, cutting into the 139,000 people the two groups currently employ.
John Hutton, the business and enterprise secretary, said he would present an order in Parliament to extend an exemption on public interest grounds to allow the combination.
"In this case, financial stability must trump competition," Britain's Treasury chief Alistair Darling told the BBC Radio 4's Today program on Thursday.
"A year ago, it would have been very difficult for this deal to have gone through," said Lloyds CEO Daniels. "We live in unusual times."
