Hopes that HBOS may be able to survive as an independent bank were boosted yesterday after comments made by the chief executive of the Financial Services Authority.

Hector Sants said that he was “content with the amount of capital that is being raised by HBOS”. The Scottish-based bank, facing a takeover by Lloyds TSB, will benefit from £11.5billion of government investment — £3billion of preference shares and up to £8.5billion in ordinary shares — after the capitalisation plans announced last week.

Although Mr Sants's comments to a business audience were hedged with caution, he said: “The objective of the most recent measures has been to build confidence in the banking system, and one of the ways of building confidence in the banking system is ensuring there is sufficient capital ... to address events which are not that likely to happen but which might happen. We are seeking to reassure people that the banks are now well capitalised to deal with the unlikely events as well as the likely events.”

Mr Sants was answering a question put by Jim Spowart, the founder of Standard Life bank and Intelligent Finance, who has campaigned to keep the Bank of Scotland portion of HBOS as an independent bank.

Mr Spowart told The Times that he was surprised by the strength of Mr Sants's answer. He said: “My worry after the weekend was, ‘Is there enough money in there to keep HBOS going as an independent bank?' Hector Sants said that there is. So the question now comes back to the politicians — why are they going ahead with this merger?”

Mr Spowart asked Mr Sants whether there was enough capital being injected into HBOS to keep it going as an independent bank if shareholders rejected the merger proposed by Lloyds TSB. Mr Sants responded: “I am sure you appreciate it is normal practice for a regulator not to answer questions on individual companies, for obvious reasons. But I am conscious of the extraordinary nature of the events over the last couple of days. There are a few comments I can reasonably make because they are deducible from public information.

“It is the FSA's responsibility to make judgments with regard to the appropriate amount of capital we felt these institutions should have - that is the known factor. It follows obviously we must be content with the amount of capital that is being raised by HBOS otherwise we would have had a different dialogue with them over the weekend.”

Mr Sants was also asked about the effect the merger would have on competition. The Government has said that it will waive rules that normally prevent such a merger.

Mr Sants said that the competition rules were for the Government to consider and were not a matter for the FSA. But he hinted strongly that the tri-partite interests in banking regulation — the Government, the Bank of England, and the FSA — still believed that the HBOS-Lloyds TSB merger was needed to ensure the stability of the banking system.

Mr Spowart said later that there should be a breathing space to allow consideration of whether the merger was in the best interests of the Scottish financial industry, the bank's customers and their staff.

The author is a senior business commentator and Northern Correspondent for The Economist

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