Alliance & Leicester and Bank of Ireland have confirmed they are in merger talks following press speculation this weekend.
The move is expected to lead to cost savings of £200m.
If the merger receives approval, Bank of Ireland will become the dominant partner based on its market capitalisation, with 55 per cent of the new company.
The merger will create the UK's eighth largest banking group in terms of market capitalisation. It would also become the fifth largest UK lender based on mortgage assets.