Lloyds HBOS? Credit crunch makes anything possible

By Dan Lalor

LONDON (Reuters) - News that British bank Lloyds TSB is on the brink of buying domestic rival HBOS underscores the speed with which regulators seem prepared to ditch long-held orthodoxies to counter the credit crunch.

HBOS, Britain's biggest home loan lender, and Lloyds, which has previously been blocked from buying a smaller mortgage bank, can only have got so far by getting a nod from regulators that they want a deal to go ahead.

That unofficial steer follows the British government's decision in February to put Northern Rock into public hands -- the first major nationalisation in Britain since the 1970s and a move the ruling Labour Party had been keen to avoid.

Major action has been forced on regulators by the credit crunch in the United States where authorities have committed about $300 billion -- an unprecedented sum -- in the past 10 days to bail out mortgage lenders Fannie Mae and Freddie Mac and insurer AIG.

In Britain, an HBOS-Lloyds deal would not have been countenanced in the recent past.

HBOS is easily the country's biggest mortgage provider with a 20 percent market share. Lloyds ranks fourth with an 8 percent share, giving a combined group a 28 percent market share.

In July 2001, the government blocked an 18.5 billion pound ($33 billion) bid by Lloyds for mortgage bank Abbey National, shutting the door to takeovers among the country's major banks and forcing them to look abroad.

"The merger would be against the public interest and should be prohibited," Trade and Industry Secretary Patricia Hewitt said at the time, arguing the pair would have dominated current accounts and smothered competition for small business banking.