The owner of Yorkshire Bank and Clydesdale Bank has confirmed that it is in talks with Virgin Money (LON: VM) for a potential merger.

The merger between the banks would create the largest “challenger bank” and provide services for six million personal and business customers.

In a statement to the London Stock Exchange, Virgin Money confirmed a “preliminary and conditional proposal” from CYBG (LON: CYBG) that is worth approximately £1.6 billion.

If the deal goes ahead, Virgin Money will own 36.5 percent of the group.

CYGB has said that the proposal “provides the Virgin Money shareholders with an attractive up-front premium and the opportunity to participate in the continuing progress of the combined group”.

“CYBG recognises the strength and appeal of the Virgin Money brand. Our proposal would ensure that the Virgin Money brand would play a significant role in the combined group, subject to reaching agreement with Virgin Group,”

“The combination would create the UK’s leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks”.

Virgin Money is reviewing the proposal and said there is no guarantee that a formal offer will be made.

Following the news, Virgin Money shares increased by 7.7 percent to 336.6p. CYGB shares rose one percent to 321.4p.

CYBG will have to make a formal offer or withdraw its offer by June 4.

Thomas Moore, investment director for UK equities at Aberdeen Standard Investments, told the BBC’s Today programme: “The big mainstream banks have got huge cost advantages and it is important that there is strong competition for customers and this kind of deal will help ensure that.”

“If you have too many small lenders… without the scale economies that the likes of Lloyds and RBS has, then you’ll find that the competitive environment is too tilted in favour of those big mainstream banks.”