Rival banks are set to demand that the new giant Lloyds TSB-HBOS group sells off parts of its empire once the dust settles from the current financial crisis.

The Government today intervened to push through the tie-up on new grounds of “ensuring the stability of the UK financial system”. Current UK law only allows the Government to intervene on competition issues on public interest grounds of plurality of media ownership and national security.

Banking sources believe rival banks, especially Abbey, are likely to kick up a stink because of the huge market shares that Lloyds TSB-HBOS will enjoy once the ink is dry on the takeover. Those concerns include market leadership in current accounts, where one in three in the UK will be with the new group, and in the mortgage market, of which the new group will have 29%.

It is understood Abbey's Spanish owner Santander was approached about rescuing HBOS despite the complication that Santander is going through the rescue acquisition of troubled Alliance & Leicester.

Abbey declined to comment, saying only: “We are watching developments and their impact in current markets.”

However, sources believe that while Abbey and others will not raise complaints against the Lloyds TSB-HBOS deal at this point, it seems inevitable that rival banking groups will demand the Government “revisits the competition issues and addresses the market dominance” of the new giant.

Lloyds TSB-HBOS leaves rivals trailing, with Abbey, holding 12% of the home loans market and 8% of the nation's current accounts.

The irony of Lloyds TSB's move on HBOS is not lost on banking-industry watchers. Before Abbey was bought by Santander four years ago, an attempt by Lloyds to buy it was stopped by the authorities on competition grounds.

Abbey was first up in the wave of consolidation in High Street banking when it said it would pay £1 billion to take control of Alliance & Leicester.