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BoSI shook up the cosy cartel, but hopes of joining a third banking force came to nothing

THE arrival of Bank of Scotland in Ireland's mortgage market more than 10 years ago was the most welcome Scottish invasion since Robert the Bruce's charm offensive in these shores almost 700 years ago.

It was the swoop in to the Republic's mortgage market in 1999, when it undercut the lowest standard variable rate available by 1pc point, that left the local banks and building societies reeling.

In 2001, Bank of Scotland (Ireland), or BoSI, which was then under the leadership of Mark Duffy, shook up the 'cosy cartel' even further by launching the first tracker mortgage in this country.

The same year, BoSI really went after the small-to-medium-sized enterprise (SME) through its purchase of ICC.

Duffy executed what was viewed as a massive coup, when he acquired the ESB's retail business, including 54 branches, for about €120m. He spent tens of millions converting 44 of these into Halifax branches.

In the days of boomtime lending, it was envisaged that the project would break even between 2010 and 2012. However, the collapse of the property market and the effect of the eruption of the US subprime crisis put paid to that.

Within the Irish lending market, BoSI has been the most reliant on wholesale funding, with its loan-to-deposit ratio standing at 486pc in December 2008. This is totally unviable when banks globally are coming under intense market pressure to bring this down to 100-125pc.

BoSI's new boss, Joe Higgins, who took over from Duffy last April, looked at a number of options to lower the bank's exposure in an attempt to nudge its way into the position of a 'third banking force'.

One was for BoSI to park a large portion of its €32bn loan book -- mainly comprising its property and development portfolio -- with its parent, leaving deposits in the portion of the bank that would take part in an Irish merger.

Another solution aimed at making BoSI more attractive centred around Lloyds providing the merged entity with long-term funding as the UK group maintained a minority strategic stake. It is understood that Lloyds was in talks to bring a London-based private-equity firm in on a deal.

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BoSI also made a strong play on the fact that it could bring a sizeable SME function to a 'third force', which would otherwise essentially consist of three one-trick ponies in the beleaguered mortgage space, EBS, Irish Nationwide and Permanent TSB.

However, BoSI's hopes of gate-crashing the 'third-force' party were finally knocked on the head in recent weeks as Irish Life & Permanent, the owner of Permanent TSB, with which it had hoped to tie up, ruled out any such deal.

The question marks have hung over Lloyds' commitment to Ireland since the British government forced its elbow into taking over HBOS as the financial crisis crescendoed in September 2008 -- leaving it with a loss-making BoSI.

Lloyds has pumped €3.5bn into the Irish operation since then, including a €2bn injection last December -- using up a significant amount of the proceeds from UK bank's record-breaking £13.5bn (€15.2bn) 'rights issue' share sale the same month.

Senior sector observers believe yesterday's announcement will lead to further questions about Lloyds in Ireland, particularly at a time when it is under pressure from the UK government, which owns 43pc of the group, to preserve capital for lending to the domestic economy.

"The entire bank has got to be in play now," said one senior Dublin banker.

The legacy of Robert the Bruce's activities on these shores has been the subject of intense arguments by historians. It's likely that BoSI's advance and retrenchment -- when the economy is in dire need of credit -- will spark similar debate among financial observers.

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