Merger talks between Abbey National and National Australia Bank, which were under way for nearly a month, have broken down.
The board of NAB, which owns the Clydesdale, Yorkshire and Northern banks in the UK and National Irish in Ireland, is now considering whether to make a hostile bid.
NAB, which is being advised by Goldman Sachs, approached Abbey in late June after the mortgage lender revealed problems at its wholesale banking division.
Abbey hired Morgan Stanley, the US investment bank, to assess the potential for a deal. Ian Harley, who was still chief executive of Abbey at the time but resigned last month, was in favour, even though a deal would have been likely to cost him his job.
Talks carried on through July, with Stephen Hester, the former Credit Suisse First Boston banker who is now Abbey's finance director, and Lord Burns, the former Treasury mandarin who recently took over as Abbey's chairman, leading the Abbey side, while combative chief executive Frank Cicutto led the NAB's team.
The plan was for a straight merger between the two banks, with NAB shareholders taking about 60 per cent of a combined entity which would have been valued at more than £30bn. The group was to have a dual listing in London and Sydney and would have emerged as a fresh force in British banking, with a market position to rival the likes of HBOS.
However, the talks faltered after NAB proposed that the group be based in Australia and that NAB executives take all the senior posts. The Independent on Sunday has learnt that this was a major sticking point for Abbey, with Lord Burns arguing that it would have been unfair to the executives who had successfully run Abbey's retail operations in difficult times.
Sources close to the talks say the Abbey team were unhappy about the aggressive stance taken by NAB.
But they suggested that the deal is not dead and that if NAB were to take a more conciliatory position – offering to give the UK business a substantial amount of autonomy and retain some of Abbey's directors – there may be a chance to strike a deal.
The breakdown of talks with NAB has echoes of Abbey's failed merger with Bank of Scotland (BoS). Then, the Abbey board found it difficult to agree with BoS on management structures and head office location.
In the end the deal was ruined when Lloyds TSB made a hostile – and ultimately unsuccessful – offer for Abbey, and Halifax stepped in to secure the merger with BoS.
Abbey has started the process of finding a chief executive to replace Mr Harley, who resigned after the bank wrote off £242m to cover losses on junk bond investments. The two leading candidates are Mr Hester and John Stewart, deputy chief executive of Barclays.
A rival banker said the choice would indicate Abbey's views on its future. If Mr Hester is appointed, the group will want to sell itself off; if Mr Stewart takes the reins, Abbey will pursue an independent future.
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