Abbey National, Britain's second biggest mortgage lender, has approached Bank of Scotland, the UK's seventh largest bank which last year entered the Irish mortgage market, about a merger.

The approach from Abbey National is understood to have happened last week. Lord Tugendhat, the chairman of Abbey National, subsequently met Sir John Shaw, the governor of Bank of Scotland to discuss a potential deal. If successfully completed, a merger of the banks would create a company with a market value of about £23 billion sterling (€39 billion).