The owner of Clydesdale Bank and Yorkshire Bank, CYBG, has made a takeover approach for Virgin Money which values the lender at £1.6bn.
A combination of CYBG and Virgin Money would create the largest “challenger bank” to the UK’s biggest lenders.
It would have six million personal and business customers and a balance sheet of between £60bn and £70bn.
CYBG said it would keep the Virgin Money brand, subject to an agreement with Richard Branson’s Virgin Group.
Virgin Money confirmed that it had received a preliminary approach from CYBG on Monday evening and that its board was “in the process of reviewing this proposal”
It added that there was “no certainty” a formal offer would be made.
Virgin Money, which was founded in 1995, expanded its business in 2011 when it bought the remnants of Northern Rock for around £747m.
CYBG said it believed that a tie-up of the two businesses “would create the UK’s leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks”.