Bank of Scotland Ireland (BOSI) is preparing to shut down Halifax, its retail arm, beginning in September following explicit instructions from the UK treasury to cease lending in Ireland and repatriate €20bn of its €35bn in Irish assets under the UK government asset protection scheme (GAPS).

The move is the culmination of an extensive strategic review, dubbed Project Primrose, begun by the bank after the UK government engineered the rescue of BOSI's Edinburgh-based parent bank, HBOS, last September by forcing it to merge with Lloyds TSB, which is now 43% state-owned.

The outcome of Project Primrose, which was discussed at a board meeting two weeks ago, and the orders coming from the UK have bitterly divided the executive committee which runs BOSI in Dublin, leading to the departure last week of head of retail banking Antoinette Dunne - considered a rising star and possible successor to chief executive Joe Higgins.

According to informed sources, two more executives are planning to depart "within weeks" over the changes. The discord became so serious last week that Lloyds dispatched UK executive Jo Dawson to Dublin on Thursday to help quell the unrest.

The bank is planning to formally announce the restructuring at the end of August as part of a larger strategic statement by Lloyds, sources said. After the changes, BOSI would comprise a "rump" bank made up of its business banking division and possibly the savings and investments side of the retail business. The property development lending business will all but disappear when the €20bn in assets transfers to the UK parent bank's balance sheet.

A BOSI spokesman said it was bank policy not to comment on strategy.

Halifax opened in January 2006 after BOSI acquired the 54-branch ESB shop network, immediately establishing it as a high street presence and so-called "challenger brand" to the established retail banks. Building on the work of BOSI's personal banking, Halifax tried to peel off existing customers from AIB and Bank of Ireland by offering innovative products such as tracker mortgages, interest-bearing current accounts and 0% interest credit cards.

BOSI lost €250m in 2008 after taking a €553m impairment on bad loans. Halifax has effectively withdrawn from all new lending this year, according to sources, through uncompetitive pricing on mortgages and other loans.