The Chelsea and the Yorkshire building societies have agreed to join forces as the aftershocks of the financial crisis continue to reverberate round the sector.
The merger between the two creates an organisation with £35 billion of assets, 178 branches and 2.7 million members.
This will rank as the second largest building society in the UK – and close the gap with sector behemoth Nationwide.
The two building societies will retain their brand names although the enlarged group will be known as the Yorkshire Building Society. It will focus on the traditional building society business of residential mortgages and savings and will be principally retail funded.
Iain Cornish, chief executive of Yorkshire Building Society said: "This merger creates a second major force in the building society sector. Joining with Chelsea offers a great opportunity to build on the strengths of both societies and form a strong, independent mutual organisation.
"The enlarged Society will continue to have one of the strongest capital positions of any major UK bank or building society and a secure funding base."
The Chelsea - the UK's fourth largest building society – yesterday said that the tie-up with its larger rival followed a review of its operations rather than liquidity problems.
However, the move will strengthen Chelsea's capital position by swapping £200 million worth of subordinated notes for £100 million of convertible 15-year notes paying interest of 13.5%. These will be issued by Yorkshire on completion of the deal.
The notes will convert into profit participating deferred shares in Yorkshire if the society's core tier 1 capital ratio falls below 5%.
In the meantime, the deal still requires the approval of the societies' members and the City watchdog. If all goes according to plan the deal will go through by April next year.
The Yorkshire, which has its head office based in Bradford, has two million members, 143 branches and assets of over £20 billion at the end of June.
The Chelsea has around 700,000 members, 35 branches and assets of £14 billion as of 30 June. Back in August, it fell foul of mortgage fraud, losing £41 million on buy-to-let and self-certification loans. This pushed it to a £26 million loss for the first half of 2009.
Both have suffered turbulent times as part of the credit crisis and were consequently downgraded by ratings agencies Fitch and Moody's earlier this year.
Today's potential deal marks further consolidation within the sector.
Nationwide - by far Britain's biggest building society - has stepped in with takeovers of the Cheshire and Derbyshire building societies, and parts of Dunfernline, while Leeds-based Skipton Building Society swallowed up the Scarborough Building Society.
The Chelsea and Catholic have merged, while the Yorkshire rescued its smaller rival in Barnsley. Britannia Building Society, meanwhile, has combined forces with the Co-Operative Bank.