Under the agreement, the Co-op will acquire 4.8 million customers and a £24 billion balance sheet for a knock-down price of just £350 million upfront. The combination of the Co-op's existing network with Lloyds TSB and Cheltenham & Gloucester brands will result in a total of 1000 branches, representing a ten per cent share of the UK network, and a seven per cent share of all UK current account customers.

Lloyds, which has been forced into the fire sale by regulators as payback for a state-funded bail-out in 2008, had been hoping to realise £1.5 billion from the disposal. The bank stands to earn an additional £400 million earn-out depending on the performance of the business over the next 15 years.

As part of the deal, the combined bank will ultimately operate on a separated version of Lloyds' proven IT platform, managed under a long-term service agreement. This was considered a key provision by regulators, to avoid the risks of disruption to existing customers from a technology handover.

It is anticipated that the earliest point at which the migration of the existing Cooperative Banking systems to the LBG IT platform would begin is 2015. The outsourcing deal will be operated "under commercial market terms", says the Co-op.

The Co-op says the new business will provide a challenger bank capable of providing real competition and a genuine alternative to the dominance of the big four banks on the high street.

The Forum of Private Businesses welcomed the deal. Senior policy advisor Alex Jackman, says: "This could be a really significant development for small firms looking to restore traditional relationship banking, where the tick box lending criteria approach will hopefully have no place.

"Co-op is already a respected high street name with great ethical standards and credentials most other banks can only dream of. If this deal goes through it could genuinely be a fresh new era for high street lending for SMEs - something we have long been calling for."