LLOYDS TSB is secretly providing financial support to HBOS through a £10 billion loan facility, in a covert agreement between the two banks.

The revelation of the deal, to help HBOS with its wholesale-funding needs, comes after two of Scotland’s most senior bankers launched a sensational attempt to block the proposed takeover of HBOS by Lloyds. The loan shows how closely they are working ahead of the merger and the scale of support will surprise the City.

Sir Peter Burt, the former chief executive of Bank of Scotland, and Sir George Mathewson, the former chairman and chief executive of Royal Bank of Scotland, claim HBOS shareholders are getting a raw deal.

In a letter to HBOS chairman Lord Stevenson, Burt and Mathewson have demanded they be installed as chairman and chief executive with a view to keeping the bank independent. HBOS has rejected the approach and in a return letter sent to the duo yesterday Stevenson said: “There is no basis for any further discussion.”

HBOS has agreed to an £11.5 billion capital injection backed by the government on the condition that it proceeds with the Lloyds takeover. However, if it stays independent it will need to raise additional capital.

“The takeover by Lloyds is not in the public interest, and it is not in shareholders’ interests,” Burt said yesterday. “This is a business that under normal circumstances would make a lot of money. To cast it all away for a mess of potage does not seem to be in the public interest.”

The two knights are to start a campaign to win support from 10% of HBOS investors for an emergency meeting to vote down the deal.

“In light of the availability of new capital from [the government] for HBOS, the takeover is no longer necessary to ensure financial stability,” the two bankers said in their letter.

They say Lloyds has “fared little better” than HBOS in the financial crisis and HBOS shareholders are entitled to a larger share of the new company. They also claim Lloyds needs a “comparatively larger” sum of money from the Treasury, relative to the size of its balance sheet.

The terms of the deal would leave HBOS shareholders with about one third of the enlarged group. In balance-sheet terms, however, HBOS is almost twice the size of Lloyds TSB. The furore over the HBOS deal comes amid further bad news from the banking sector.

HSBC is expected to reveal tomorrow it has been forced to take a further $5 billion (£3.1 billion) in bad-debt charges from its US business.

Meanwhile, John Varley, chief executive of Barclays, will this week meet an “awkward squad” of his big institutional investors who are aggrieved at the terms of the bank’s £7 billion Middle East cash injection. The group is thought to include Legal & General and Scottish Widows.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive