The decision by Stephen Byers, the Secretary of State for Trade and Industry, not to refer the bid to the Competition Commission sent bank shares soaring in anticipation of a far-reaching shake-up of the banking sector. NatWest shares alone soared nearly 9 per cent to pounds 14.71.
City analysts said that the decision means the Government has decided that it is not going to stand in the way of further bank mergers and takeovers, despite their profound implications for jobs.
Bank of Scotland has already hinted that as many as 15,000 jobs could go at NatWest if its bid succeeds. These would be in addition to the thousands that the big banks cut this year.
The biggest beneficiaries of yesterday's decision are likely to be foreign banks, particularly as Barclays and Lloyds-TSB would still be blocked on competition grounds from taking over NatWest.
Citicorp, the American banking giant has been seeking a European bridgehead for some time. Citicorp's name has been linked repeatedly with that of Barclays, which is seen as vulnerable to a takeover offer.
Mr Byers is still deciding whether to allow the Royal Bank of Scotland to bid for NatWest. However, the view in the City is that he is likely to give that, too, the green light.
Other prime candidates for take-over or merger within the sector include Abbey National, the first of the old-style building societies to become a full bank, and Alliance & Leicester which earlier this year attempted a merger with Bank of Ireland in what would have been Europe's first major cross-border banking deal.
Midland Bank, until recently one of Britain's best-known banking names, has already disappeared from the high street. The bank was taken over five years ago by the Hong Kong & Shanghai Bank. Earlier this year all Midland Bank branches in the UK were renamed HSBC.
Explaining his decision yesterday, Mr Byers said that the Office of Fair Trading had looked at the NatWest bid and concluded that it did not raise any serious competition issues: "The banking sector is of central importance both in its own right and for the economy as a whole," he said. "I am persuaded that the merger will not have any adverse effect on competition.
The parties have branch networks that are concentrated in different areas of the country, and they face significant competition from other institutions over a range of their services," he said.
Some commentators believed that the Government would choose to refer the bid rather than open the floodgates to the kind of bloodletting that now seems inevitable. Banks are expected to scramble to cut costs and close branches in the face of the threat posed by the Internet to their traditional business.
Complaints about poor service and high bank charges are already the subject of a formal government review led by the former telecoms watchdog Don Cruickshank. He is due to report early next year. There was an expectation following recent "rip-off Britain" style attacks on the banks, that the government would use this bid as a pretext for a wider investigation into the sector.
Only this week Stephen Byers and Melanie Johnson, the economic secretary to the Treasury clashed with the banks over their attempts to impose charges on customers seeking to withdraw money from cash machines.
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