Blue-blooded investment bank NM Rothschild has replaced Merrill Lynch in the lucrative gig of advising the Government on its attempts to sort out the banking sector.

Rothschild will also play a key role in shaping the landscape of the sector as the Department of Finance prioritises consolidation among second-tier lenders once the National Asset Management Agency (NAMA) is up and running.

Merrill Lynch was hired last September as the financial sector went into meltdown, and played a large role in shaping the Government's decision to bring in the €440bn blanket banking guarantee scheme.

The pace of the unfolding crisis at the time meant that the original contract never went out to tender. Merrill, whose contract expired at the end of June, was paid a basic retainer fee of €2m, which could rise as high as €6m.

The investment bank was heavily involved in the State's €3.5bn bailout of Bank of Ireland (BoI) and Allied Irish Banks (AIB) earlier this year through the National Pension Reserve Fund (NPRF).

The new tender went out in July through the National Treasury Management Agency, which is working very closely with the Department of Finance on its efforts to shore up the system. The NPRF and NAMA both fall under the auspices of the agency, headed by Michael Somers.

The NPRF charged BoI and AIB €30m each in 'arrangement fees' for the recapitalisation, lining the State's purse to help cover a slew of adviser fees regarding the sector.

The tender called for services to include advising the Finance Minister in dealing with EU Commission requirements, general advice on various aspects of the banking system and potential transactions, sectoral restructuring and viability planning. AIB, BoI and Anglo Irish Bank, which was nationalised in January, each have to provide Brussels with restructuring plans over the coming months.

Merrill Lynch had a hand in Finance Minister Brian Lenihan sending out signals last November to the covered institutions that he expected massive consolidation within the sector. This left top bankers at the time with the strong view that he was looking to shoehorn the lenders into the two top banks.

The issue died down over the subsequent months, though Irish Life & Permanent (IL&P) went on to begin merger talks with EBS Building Society in an effort to persuade the minister that it could form a credible 'third force' in the Irish market. But even those talks died down after three of IL&P's top executives resigned in the February.

Consolidation among the smaller lenders will become a pressing issue again over the coming months as banks are left with gaping holes in their balance sheets after writing down the value of loans headed to NAMA.

Government sources have suggested the creation of a 'super mutual', potentially bringing together the banking arm of IL&P with EBS and Irish Nationwide.