The Co-operative Bank is set to return to mutual status after more than a decade following a £780m takeover by the Coventry Building Society.
The two sides said a takeover deal for the 150-year old lender was agreed after unveiling a blueprint for the merger last month.
Co-op’s two-and-a-half million customers will transition to becoming mutual members over the next few years.
The deal marks a sudden revival for the mutuals industry, which fell out of favour in the late 1990s.
Under plans unveiled in January, the Labour Party is aiming to double the size of Britain’s mutual sector to drive more “community-oriented” lenders instead of banks.
UK financial regulators would be forced to report every year on how they support the mutuals sector, and rules would be relaxed on building society funding under the proposals.
Nationwide’s deal to buy Virgin Money is also set to turn the bank into a mutual.
Coventry said its two million members will not be given a vote on the deal, with the board saying members were more concerned about the quality of service.
The Coventry tie-up will create a so-called “super mutual” with an £89bn balance sheet.
Coventry, which employs 3,000 people, is currently the eighth largest mortgage lender in the UK. The deal will catapult them up the league tables.
Gary Greenwood, an analyst at Shore Capital, said mutuals were reaping the benefits of weakness among smaller banks.
He added: “The larger ones are certainly taking advantage of some smaller, weaker banks to grow their businesses and establish a stronger market position.
“Providing they can retain the customers of the acquired banks, there will naturally be an increase in the number of UK consumers that ‘belong’ to a mutual.”
David Thorburn, chairman of Coventry, and chief executive Steve Hughes will remain in their roles at the combined group.
Co-operative Bank chairman Bob Dench said Coventry would be a “very good home for us”.
Mr Dench said: “This transaction sees The Co-operative Bank returning to mutuality. I am very proud of all those who have worked so hard over so many years to rebuild the Bank.”
The Co-op Bank was rescued by a consortium of hedge fund lenders led by JC Flowers in 2013 after an accounting black hole was discovered when it attempted to buy Britannia Building Society.
Coventry said it was committed to remaining a building society and playing a role maintaining a “strong mutual sector”.
The integration of Co-op will take place over “several years” and both brands will remain in place during the period, meaning customers are unlikely to notice any major changes initially.
Both sides unveiled a preliminary agreement last month to merge and today’s announcement rubber stamps the deal.
Under the terms of the deal, £125m of the £780m will be deferred for three years and hinge on the success of the combined group.
