The transaction, which the bank insists is far from certain, could increase the risks associated with trading in Irish shares, causing overseas investors to shun the market. Counterparty risk is a measure of a stockbroker's ability to deliver on its side of the bargain and, without the backing of a big institution such as Bank of Ireland, Davy could be seen as a more risky proposition.

This would have serious implications for the Irish market as a whole because of Davy's dominant position, where it has an estimated 40% market share. It acts as stockbroker to all of the top blue chips except for AIB and Independent News & Media.

A management buy-out could also limit Davy's ability to trade shares on its own account, reducing liquidity in Irish equities. Proprietary trading can be hugely profitable for stockbrokers but is also risky because, instead of trading on behalf of clients, the broker is acting on its own account.

"Davy is an important market maker and, to the extent that it might not be able to continue on the same scale, that will have implications for the market, " said one insider. "They may have to review the extent to which they make market or trade on their own book."

The proposed management buy-out is seen as part of a high-stakes battle to keep top talent within the firm as well as a means of providing a profitable exit for existing management. Led by Brian Davy, David Shubotham, Tony Garry and Kyran McLaughlin, they engineered the lucrative sale of the firm to Bank of Ireland in 1988. The deal gave them £30m ( 38m) plus a 10% equity stake in Davy. But while they surrendered ownership, management maintained control of Davy by keeping 51% of the voting rights. Shubotham subsequently left the firm.

It is understood that this arrangement caused difficulties in recent years because, while top management had a valuable stake in the business, rising stars were locked out of the equity. This has led to a number of high-profile defections.

According to one well-placed source: "You have the young Turks working day and night but with no opportunity of getting a piece of the action. On the other hand, the principals are probably looking for an exit mechanism. The only way that they could get taken out at what they would consider to be fair value would be for the bank to buy them out or for Davy to be taken over by somebody else."

A management buy-out at Davy would be the latest in a string of ownership changes at the country's top stockbrokers. In 2003 management bought NCB Stockbrokers from Ulster Bank in a deal worth up to 20m while last November Iceland's Landsbanki paid more than 30m for control of Merrion Capital.