The news of Irish Life's merger talks with Irish Permanent came as a major surprise to most in the market, not least to Abbey National, which built up a 8.7 per cent stake in the Permo shortly after the 1994 float.

When Abbey bought that stake, there was the usual guff about "strategic investment", when it was as clear as day that Abbey was cementing a strong foothold in the Permo in anticipation of the end of the former building society's takeover-proof period in October next year.

Now, all that Abbey can look forward to is a hefty profit on its initial investment - probably more than £40 million based on the current elevated Permo share price. The only other option is to mount a hostile bid against any package that emerges from the current talks. That sounds unlikely.

The Irish Permanent management would be far happier with Irish Life as a partner, than with Abbey National.

If the likes of Abbey did take over the Permo, it is perfectly conceivable that a host of head office functions would be relocated to Britain, just as much of National Irish Bank's IT operations are now run out of Britain. Many top jobs would also undoubtedly disappear.

It looks likely that the Irish Life merger with Irish Permanent will go through - although let's face it, any deal involving one party twice as big as the other is more a takeover than a merger. But an Irish Life & Permanent (or whatever the merged entity is called), as a sizeable number three in the market, would be a focus for some fundamental rethinking among the smaller financial institutions, not least at Ulster Bank and National Irish Bank.

Clearly, with AIB, Bank of Ireland and an Irish Life & Permanent offering a host of services spanning personal and corporate banking as well as life and pensions, the pressure will be on the smaller players to respond. But how?

Given its recent record, National Australia Bank - despite its protestations - is far more likely to get rid of National Irish Bank than expand the Irish operation. Natwest-owned Ulster will also have to look at expanding its base and could consider looking to buying the merged TSB/ ACC - which could also be a target for the merged Irish Life and Irish Permanent.

As for newly-floated First Active, and Anglo-Irish Bank, are they going to have the critical mass to compete in a banking market where the big are getting bigger and the ability to offer a broad range of services will become more and more important?

There are many who believe that the building society was only floated in the first place with an eye to being taken over when its five-year protection runs out.

Anglo-Irish has undoubtedly carved out a profitable niche in the small to medium-sized corporate market. But the very fact that it is a big corporate lender in a booming economy has led many in the market to speculate that Anglo may be the next to receive an approach.