Lloyds-TSB is watching the takeover battle for NatWest closely, with a view to making an offer of its own for either Bank of Scotland or Royal Bank of Scotland, should their hostile bids fail, reports The Daily Telegraph.

A Lloyds source said that, if the Scottish banks fail to win, they would be vulnerable. Lloyds could use their arguments in favour of consolidation - deployed in the NatWest battle - against them. He said a bid by Lloyds would be obvious. The source also revealed that Lloyds had considered making a bid for NatWest itself.