The worsening credit crunch may be about to generate a first merger of prominent commercial banks, with Lloyds TSB close to finalising terms for a takeover of HBOS.Britain's government and Financial Services Authority are encouraging the merger, according to BBC, Financial Times and subsequent reports, and they will act to ensure that competition laws will not stand in the way of a merger. No government financial support would be involved, according to the FT.The takeover of HBOS would give Lloyds about 29 per cent of the consumer banking market in Britain.The BBC (which broke the news last night) has in the last hour reported that LLoyds and HBOS agreed on an all stock deal that notionally values HBOS at £2.32. This compares with the price of £2.75 for the recent HBOS rights issue, the BBC's report of an offer around £2.80 and an HBOS share price around £10 a year ago.HBOS shares overnight traded in a range between a low of 88 pence and £2.20 and closed at £1.47. Shares in Lloyds were steady at £2.80.Should a takeover agreement emerge it may put the long-running speculation of a sale of HBOS' Australian businesses, including BankWest, on the back-burner, at least while Lloyds reviews strategy.Lloyds sold its boutique banking business in Australia in the late 1990s (a business run by the current HBOS Australia chief David Willis) and sold National Bank of New Zealand to ANZ in 2003.Meanwhile the Herald Sun reports that HBOS contributed $1.6 billion in capital to its Australian holding company at the end of July, taking the paid-up capital to $3.9 billion.