One of Britain’s biggest building societies has tabled a surprise takeover bid for the Co-operative Bank – a deal that would effectively remutualise one of the country’s most recognisable high street lenders.

Sky News can exclusively reveal that the Coventry Building Society has proposed a tie-up with the Co-operative Bank that would create a financial services powerhouse with close to £90bn in assets.

Talks between the two sides are understood to be progressing, although they are not yet being undertaken on an exclusive basis.

The Coventry’s intervention in the auction of the Co-operative Bank will surprise the industry, since the mutual had not been tipped as a likely bidder.

However, industry insiders said a combination of the two businesses would present a strong cultural and financial fit, while also delivering a huge boost to the cause of financial services mutuals in Britain.

A combined group would be comparable in size to Virgin Money, the London-listed banking group, and would have about five million customers.

The Coventry, which is being advised by the accountancy firm KPMG on the talks, is regarded by peers and regulators as having a credible management team, led by Steve Hughes, its chief executive.

Until last year, the society – the UK’s third-largest by assets – was chaired by Gary Hoffman, the veteran banker who rescued Northern Rock during the 2008 banking crisis.

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A combined Coventry-Co-op Bank would be comparable in scale to Virgin Money

Nevertheless, a takeover on the scale of the Co-operative Bank would represent a hugely ambitious move for an organisation which has undertaken few sizeable corporate deals.

One source said the Coventry, which has about two million members, appeared to be “extremely serious” about a deal.

The price under discussion between the Coventry and the Co-operative Bank and their respective advisers was unclear on Wednesday.

Banking analysts have previously touted a price of approximately £800m for the Co-operative Bank.

A spokesman for the mutual said: “At Coventry Building Society, we remain open to opportunities that may enhance the value and services we offer to our current and future members, but we don’t comment on any public speculation.”

Combining the organisations would give the Coventry a major boost in the personal current account and business banking markets.

It was unclear on Wednesday what the fate of the respective brands would be after any deal.

The Co-operative Bank has also drawn interest from other suitors during an auction which kicked off earlier this year.

Shawbrook Bank tabled a predominantly paper-based offer, while Aldermore Bank withdrew from the process without submitting a formal proposal.

Regulators are being kept closely informed about the talks, with one bank analyst saying a takeover by the Coventry would vindicate the constructive approach taken by the Prudential Regulation Authority towards the Co-operative Bank as it encountered severe turbulence during the last decade.

If the Coventry was successful with a bid, it would effectively deliver the Co-operative Bank back into mutual ownership.

In 2013, the Co-operative Bank’s bid to acquire the branch network which became TSB was left in ruins when the scale of its own crisis emerged.

At the time, it was part of the wider Co-op Group, but was forced to turn to American hedge funds to secure a £1.5bn rescue, even as its former chairman, Paul Flowers, was left humiliated by tabloid revelations about his private life.

The lender then needed a further bailout by investors in 2017, with two major investors – Bain Capital Credit and JC Flowers – subsequently taking a 10% stake in the company.

The remainder of its equity is owned by a syndicate of hedge funds.

Earlier talks about a sale of the Co-operative Bank to Cerberus Capital Management, an often-controversial investor, broke down in December 2020.

In the autumn of 2021, the Co-operative Bank approached Spanish-owned TSB about a merger, but talks failed to progress.

PJT Partners and Fenchurch Advisory Partners are advising the Co-operative Bank on its sale process.

A spokesman for the Co-op Bank declined to comment.