Jeremy Warner: An independent HBOS? Hope springs eternal

Outlook: The chance to create such a powerful monopoly will be too tempting for shareholders in both banks to pass over

Is HBOS still viable as a standalone bank? That's the nub of the question raised by the two Scottish banking chieftains – Sir George Mathewson and Sir Peter Burt – who want to ditch the proposed merger with Lloyds TSB and recreate the glory days of Edinburgh-based banking with a newly invigorated and independent HBOS.

A month ago, the answer to this question would have been an unambiguous no, which is why the UK Government agreed to waive normal competition laws to allow what is self-evidently a monstrously monopolistic and job destructive merger to go ahead. But that was at a stage when public policy was still to try to deal with the problem banks one by one. Despite the merger's obvious drawbacks, it looked back then a better solution than the alternative of outright nationalisation.

The game has changed since. The Government has put in place an industry-wide funding and recapitalisation programme which may go some way to obviating the need for HBOS to be "rescued" by Lloyds TSB. That's what the two knighted Scots believe, anyway. These are formidable characters with big reputations – if that can be said about any banker these days – yet it looks like a bit of a long shot to me. Other than themselves, they bring nothing to the party, either in terms of capital, strategy or backers.

The only compelling part of their case is that, from a competition perspective, the Lloyds TSB merger stinks, but if HBOS isn't going to survive anyway, such considerations become largely irrelevant. One way or another, the number of players in UK retail banking would shrink.

Lloyds TSB has already admitted that the Treasury would require it to raise even more capital if it was to continue as an independent bank. The same thing presumably applies to HBOS, which as a consequence would become largely Government-owned and therefore, in effect, nationalised. Like Northern Rock, it might therefore be obliged to be put in run-off. In any case, there would be no early return to the expansionist banking that Sir George and Sir Peter used to champion.

I'm not saying their proposals lack all credibility. They certainly need to be taken more seriously than Jim Spowart, who now seems to be claiming the backing of Bank of China for his ambitions on HBOS. That the Chinese bank, which by the way is partly owned by Royal Bank of Scotland, would want to buy a UK mortgage bank at a time when China is reining in its horns to deal with the more immediate concern of economic downturn at home strikes me as about as likely as a month of Sundays, but then many things about the unfolding banking crisis which have seemed far-fetched have turned out to be true.

The Government cannot change its mind on allowing the Lloyds TSB merger now, even if it might privately want to see the two Scots – once fierce rivals but now apparently the best of friends – succeed. If sentiment in the banking market continues to improve, they might be in with an outside chance, though I fear that even then the chance to create such a powerful monopoly will be just too tempting for shareholders in both banks to pass over.

Besides, does Sir George really want to be chairman of a bank that's not allowed to pay multimillion-pound bonuses? He once said of his own bonus while still at RBS that it wouldn't even give bragging power in a Soho wine bar. Times change. He'd be surprised how little it takes these days.