THE UK Treasury yesterday indicated for the first time that it may consider injecting funds into an independent HBOS if the bank's proposed merger with Lloyds TSB collapses.
The move is a departure from the Treasury's repeated refusal to say what it might do in such an event, which it sees as "hypothetical".
It also offers hope to any HBOS shareholders opposed to the merger that an alternative rescue package for the
bank could emerge.
And it casts doubt on comments earlier this week by Lord Mandelson, the new Business Secretary, that the £11.5 billion government bail-out for HBOS was "predicated" on the merger going ahead.
The Scotsman learned yesterday that Chancellor Alistair Darling was "prepared to listen" to any new proposal from HBOS in the event that the merger with Lloyds TSB, which is itself in line for £5.5 billion of government cash, collapsed or was rejected by shareholders.
A source close to Mr Darling said an alternative recapitalisation programme could still go ahead if HBOS applied for it, but the amount would need to be reconsidered.
The source said: "The Financial Services Authority would decide on the level of capitalisation. They would assess what was needed. HBOS could raise it on the open market and if they didn't, they could go back to the government."
The development comes as the Office of Fair Trading today submits its report on the proposed merger to Lord Mandelson. The report, which is unlikely to be published for some weeks, analyses the impact of a merged institution on High Street competition and the effect on customers. It does not consider the effect of HBOS remaining independent.
Alistair Carmichael, the Liberal Democrat shadow Scottish secretary, described the Treasury's new stance as a "significant development". He said: "It's certainly welcome, though there is a long way to go.
"Things have moved on so far and so fast since the takeover was first mooted that we can't treat it as it was. Looking to the long term, there is a real problem in terms of the competition element of the takeover. It's not good, particularly for the Scottish financial sector, and it's not good for the high street competition point of view."
The merger is favoured by Labour and the Tories, while the SNP and Lib Dems have called for a period of reflection. HBOS believes the merger is the best way to ensure the bank has sufficient access to funds at a time when inter-bank loans are more difficult and more expensive to secure.
An HBOS spokesman said: "It makes real economic sense for HBOS to be part of a bigger and stronger group."
Top banker calls for Bank of Scotland to be separateA LEADING Scottish banker has added his voice to calls for Bank of Scotland to be run as a separate entity.
Charles Munn, the former chief executive of the Chartered Institute of Bankers in Scotland, said he believed Bank of Scotland should be spun off as a separate company when HBOS is taken over by Lloyds TSB.
Mr Munn, who is to speak today at a workshop hosted by the University of Glasgow's Centre for Business History, told The Scotsman that it was crucial to the Scottish economy for the bank to retain head offices here. He said: "As an old Scottish banker, I would like to see the merger not happen. I would much prefer to go back to where we were before – when Bank of Scotland was disengaged from Halifax.
"It is always an advantage for a country to have headquarters of big corporations, the decision-makers, based (in it]."
