Lloyds will sell 632 branches to the Co-operative in a deal hoped to be completed by the end of November 2013
The Co-operative Group has hailed its deal to buy 632 Lloyds Banking Group branches for up to £750 million as "the biggest shake-up in high street banking for a generation".
The group said it will become a "new challenger" in British banking after announcing the long-awaited agreement, which will triple the size of its banking arm to nearly 1,000 branches and increase its share of UK branches to around 10%.
It is seen as a cut price deal for the Co-op, with the group agreeing to pay Lloyds - which is 40% owned by the Government - £350 million upfront and a potential further £400 million by 2027. However, the price tag is far short of the £1.5 billion first mooted.
Part-nationalised Lloyds admitted it would suffer a loss on the sale, although it said this would be offset by a fall in the amount of capital it has to hold on its balance sheet.
The Treasury welcomed the announcement, which it said formed part of a raft of measures to reform the banking system and improve competition.
The deal will transform the Co-op into a major player in British banking, bringing around 4.8 million customers to the mutual, meaning the combined business will see its share of the current account market soar from around 2% to nearly 7%. Five years ago, the Co-op had just 90 banking branches.
Chancellor George Osborne said: "This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy.
"The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals. This follows the sale of Northern Rock to Virgin Money in January and represents another important step towards a more competitive banking sector."
Around 8,000 staff are expected to transfer with the deal, including around 3,000 support staff in call centres and administration sites, and the Co-op said it aimed to retain employees.
David Fleming, national officer for trade union Unite, which represents staff at both banks, said: "This brings to an end a long period of uncertainty for the staff, who will welcome the clarity this decision will bring."