The British government has cleared the way for a £27 billion sterling merger of mortgage bank Halifax and Bank of Scotland.
The move is seen as giving a green light to consolidation among mid-sized banks which would include Ireland’s leading lenders.
The Labour government said the nil-premium merger, unveiled in May, did not raise major competition worries because the merged bank - the Britain’s fifth largest - would still fall well short of the clout wielded by the country's big four banks.
"In fact, it may strengthen competitive pressures on the big four," British Trade and Industry Secretary Ms Patricia Hewitt said in a statement today.
The merger - effectively a takeover of Bank of Scotland by the larger Halifax - was widely expected to receive regulatory approval, and shares in the two banks barely moved on the news.
But Ms Hewitt's comments were seen as a further sign of the government's desire to see smaller banks merge and take on the big four - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland.
"It's very clear that the agenda is to encourage consolidation amongst the smaller players to create more material competitors to the big four," said banking analyst Mr Richard Coleman of investment bank ABN AMRO.
The market is speculating that the next UK banking marriage could involve mortgage bank Alliance & Leicester, which has said it is open to "attractive offers". Its most likely groom is rumoured to be National Australia Bank.
Halifax, Britain's largest mortgage lender, said the new bank - to be called HBOS - would take the fight to its bigger banking rivals.
Alliance & Leicester shares were down 0.8 per cent at 804p.