A potential merger between Halifax Bank of Scotland (HBOS) and Lloyds TSB would create a banking colossus.

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The combined group would have a dominant role in the key markets of mortgages, savings and current accounts.

HBOS is already the UK's biggest mortgage lender, writing one in five of all new home loans, while Lloyds TSB through its Cheltenham & Gloucester brand is the third biggest lender overall, and wrote 24 per cent of new mortgages during the second quarter of the year.

If a merger was to go ahead, the two groups would have a combined mortgage book of £335.1bn, dwarfing their next nearest rival Nationwide, which had outstanding mortgages of £118.9bn at the end of 2007.

The two groups also dominate the savings market, with HBOS the biggest savings provider and Lloyds TSB the third largest, with retail balances of £139bn and £65bn respectively.

Lloyds TSB is the UK's biggest current account provider, and 22 per cent of all new current accounts that were opened during 2007 were with Halifax or Bank of Scotland.

But despite the potential size of the combined operations, the move is unlikely to be good news for consumers.

There are currently five big high street banks, namely Barclays, HSBC, HBOS, Lloyds TSB and Royal Bank of Scotland, and a merger between Lloyds TSB and HBOS would shrink this to just four.

Ray Boulger, senior technical manager at John Charcol, said: "Clearly it would create an even bigger major player than we already have.

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"But it is bad news for consumers, any reduction in competition is nearly always bad news for consumers."

He said the big concern would be that most of the brands at HBOS, which includes Halifax, Bank of Scotland and Birmingham Midshires, would be collapsed into the brands of the company that was taking it over.

He said that while Cheltenham & Gloucester's mortgage rates generally had the edge over the ones being offered by Halifax, the HBOS group had a far wider product portfolio and was still lending to people with just a 5 per cent deposit, whereas Cheltenham & Gloucester demands a 10 per cent one.

He added that HBOS's savings rates, particularly through its Birmingham Midshires brand, were more competitive than ones offered by Lloyds TSB.

Mr Boulger also said that while the Competition Commission was likely to raise concerns about the deal if a merger between the two groups was announced, it was unlikely that it would block it.

He said: "In a normal market if Lloyds TSB was looking to take over HBOS, I think the Competition Commission would be interested.

"But in the current environment and when the talks are because HBOS, or the Financial Services Authority, or the Bank of England feel they should engage in talks, the Competition Commission will be told to shut up."

Kevin Mountford, head of banking at moneysupermarket.com, said: "A shotgun marriage of HBOS and Lloyds TSB would not be in the best interests of British consumers."

He said with Alliance & Leicester being taken over by Abbey's parent Santander, and Nationwide taking over two building societies, there was a large reduction in competition and choice for consumers.

He said: "It is the likes of A&L and Halifax that have been the most competitive for current accounts and many other products.

"HBOS can survive and prosper independently and in the medium to long-term this is the better option for consumers."