The number of banks placing themselves on the auction block will increase dramatically if global financial markets continue to deteriorate, according to the banker who masterminded Santander’s £1.3 billion takeover of Alliance & Leicester (A&L).

The Spanish bank’s bold move for A&L two weeks ago, and an announcement last week by Paragon, the mortgage lender, that it is in talks with a number of potential bidders, ignited speculation that global financial investors’ interest in UK financial sector was returning.

But Andrea Orcel, head of global origination at Merrill Lynch, told The Times that at present bank boards remained resistant to acquirers. Share price highs and ambitious expansion plans of a year ago are still fresh in their minds, Mr Orcel said, but worsening economic conditions will bring a flurry of opportunities for buyers.

“Despite the impact of the credit crisis, few institutions have actively looked to sell themselves,” he said. “But if the market continues to deteriorate, their number will increase dramatically.”

Hector Sants, chief executive at the Financial Services Authority (FSA), said earlier this week that the City watchdog had advised companies to examine their ability to survive an economic downturn.

Mr Sants told the FSA’s annual general meeting: “Firms will have to consider their own business models and whether they are sustainable in the new environment that's emerging."

He also said that the FSA has been more “directive, prescriptive and brave” in the directions it has issued to companies as they struggled through the credit crunch.

The watchdog is believed to have pressured a reluctant A&L to consider Santander’s advances by reminding the board of its legal obligations to shareholders should they reject a bid, only to reveal lacklustre first-half figures and a reduced dividend at the bank’s interim results this Friday. Santander’s bid includes the interim dividend.

Mr Orcel said that on top of fiercely independent bid-targets, financial mergers and acquisitions were being slowed by a lack of buyers.

With many banks sitting on billions of dollars worth of complex and hard-to-value structured securities, at present bidders prefer to hold fire until the value of the assets is clearer.

At the same time, losses on sub-prime mortgage-related investments mean that few potential buyers have ready cash.

“Very few institutions are ready to make major corporate moves in this market,” Mr Orcel said. “To do so requires courage, availability of capital and a credible management team.”

Raising capital from shareholders for bids is likely to be difficult in the short term, given that investors have given more than £20 billion in additional capital to British banks in recent months.

The fact that Barclays' investors China Development Bank and Temasek, the Singaporean wealth fund, chose only to maintain or slightly increasing their holdings in the bank in its recent £4.5 billion cash call indicates that, having pumped billions into global banks during the height of the credit crisis only to see bank stocks continue to fall, investors are now shy of the sector.

Mr Orcel said: “Long-term buyers are increasingly watching a number of stocks to time their re-entry into the sector but with the negative market, high volatility and limited visibility on results, they’re staying on the sidelines for now.”

Merrill Lynch said last week that another $9.7 billion hit from the credit crunch had pushed it to a larger-than-expected $4.6 billion loss in the second quarter.

It was the bank’s fourth consecutive quarterly loss, taking its total loss for the past year to $18.6 billion and total write-downs to $43.4 billion.

However, in its statement on July 17, the bank said its non-US revenue growth was up by 13 per cent in the three months to June, driven by a 30 per cent increase in Europe, the Middle East and Africa (EMEA).

The EMEA business has been involved in some of the biggest deals of 2008, including nine of the top 13 financial mergers and acquisitions.

Aside for the A&L takeover, Merrill Lynch advised Anheuser Busch on its $55.4 billion takeover of InBev, which was agreed last week.

It has also poached high-profile bankers from rivals, including Caroline Silver, a 15-year Morgan Stanley veteran, to become vice chairman of EMEA investment banking.

Santander’s offer for A&L has been followed by fierce speculation that HBOS, which recently raised £4 billion from shareholders to bolster its capital ratios, will be a takeover target.

But so far there has been little substance to the rumours, which have helped push HBOS’s share price above its 275p per share subscription price. On Friday, the bank's stock closed up 2.9 per cent at 310.25p per share.

This week, Lloyds TSB will kick off the bank sectors’ interim reporting season.

HBOS will follow on Thursday and A&L on Friday.

Alex Potter, banking analyst at Collins Stewart, said that the season was likely to be characterised by “a myopic obsession with the balance sheet and capital ratios, an acknowledgement that, even if the credit crunch is past the worst, the impending recession is not, and again a lack of strong earnings guidance”.

Analysts at Keefe, Bruyette & Woods expect no further write downs on structured securities at Lloyds TSB but predict a steep fall in pre-tax profit at HBOS and a drop in new mortgage business at A&L.

Santander's acquisition of A&L is expected to complete in October.

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