The Co-operative Group has pulled out a deal to buy 632 branches from Lloyds Banking Group, which says it will now spin off the network in an IPO.
The Co-op says that it is backing away from the so-called 'Verde' network agreement because of concerns over the economic environment and increasing regulatory requirements in the financial services sector.
Lloyds is being forced to sell off the network of 632 branches and 754 ATMs by the European Union as payback for a state-funded bail-out in 2008. It will now divest Verde through an IPO, creating a standalone bank under the TSB brand.
In a statement, Lloyds insists it has a strong management team in place and is making good progress in "creating segregated IT systems on the proven Lloyds Banking Group platform and in building the necessary corporate functions to support front-office colleagues, branches and operational sites".
The 4.8 million customers who were set to move to the Co-op will feel no direct impact, says Lloyds, and can carry on accessing their accounts as usual via branch, phone and the Internet.
The Co-op's decision to abandon its acquisition - agreed last summer - is a blow for the UK government, which had hoped to create a major powerhouse capable of taking on the big four high street players.
However, despite some speculation that it could exit the banking business altogether, Co-op CEO Peter Marks insists the group "will continue to develop our Bank for the long-term, offering a real alternative on the high street with our strong, established brand and our reputation as a trusted financial services business".