Lord Davies, the former Standard Chartered chief and now Trade minister, has been offered the chairmanship of Lloyds Banking Group but will turn the job down.
The peer's decision to decline the job will be a blow to John Kingman, head of UK Financial Investments (UKFI), the body which owns the Government's 43 per cent stake in Lloyds, who has been assiduously courting Lord Davies over the past few weeks.
Mr Kingman and the Lloyds board are looking for a new chairman to replace Sir Victor Blank, whose surprise decision to quit as chairman next year before he was pushed over his role in the disastrous HBOS takeover has left a vacancy at the top.
But Lord Davies, who joined Lord Mandelson's hit team at the Department for Business in January, is enjoying his role too much to want to switch back to commercial life. He was brought in by Gordon Brown to help sort out the banking system and to persuade banks to get credit moving again to small businesses.
The Prime Minister had hoped he could persuade Lord Davies to take on the chair at Royal Bank of Scotland, but he preferred a ministerial role.
One source said: "Mervyn [Davies] is having a great time working with the Government and feels that what he is doing is too worthwhile to give up." It has also been suggested that Lord Davies and UKFI believe that whoever takes up the job as the new chairman would have to force the resignation of Eric Daniels, the chief executive, who with Sir Victor orchestrated the rescue of debt-ridden HBOS at the height of the banking crash.
After the deal, Mr Daniels stunned City investors when he admitted that the bank had not carried out enough due diligence on the takeover, which saw Lloyds post a £10bn loss. Investors were so furious over the deal, which saw their shares collapse in value, that they demanded the heads of both Mr Daniels and Sir Victor.
The UKFI and Lloyds will have to go back to the drawing board. Lord Leitch, who has just been appointed deputy chairman of Lloyds, is said to want the job, but is not thought to be a front-runner. Other possible names include Sir Win Bischoff, who stepped down as Citigroup chairman.
One City head-hunter said the shortage of potential chairmen to take over from Sir Victor was dire. "Many of the UK's top directors have either been implicated in the banking disasters, or, if they are any good, they don't want to get involved. There is too much mess still to clear up."Reuse content