A private equity-backed lender is planning a £3.5bn swoop on the Co-operative Bank in one of the most significant UK deals for the sector since the 2008 financial crisis. 

Shawbrook Group, the small business lender, has approached the owners of the Co-operative Bank in recent weeks with proposals for a stock-based merger.

The bank has hired Barclays to advise it on the bid in a deal that would value the Co-operative Bank, which has 2.7 million retail customers, at £800m, Sky News reported.

The merger would herald long-predicted consolidation in the mid-market banking sector amid a period of turbulence with surging interest rates and the crisis precipitated by the collapse of Silicon Valley Bank in the US.

Formerly part of the Co-op Group, its high street banking division was fully carved off and sold to a consortium of hedge funds in 2017 after it nearly collapsed, ending its historic ties to the mutual.

In 2020, The Telegraph revealed the Manchester-headquartered bank had received interest from US private equity fund Cerberus. It later explored a tie-up with Spanish-owned TSB about a potential merger, but talks fell through.

The bank, originally founded in 1872 and now led by chief executive Nick Slape, has since steadily grown its returns, making profit before tax in 2022 of £132.6m on deposits of £20bn. 

Earlier this year, reports emerged that the Co-operative Bank was exploring a sale or possible public market float, having hired PJT Partners and Fenchurch Advisory.