Outgoing Lloyds chairman Victor Blank: now the owner of Halifax which is expected to leave the Irish market

Project Primrose. The quintessentially English flower lends the perfect code name for Bank of Scotland Ireland's (BOSI) root-and-branch operational assessment, which was initiated in the wake of the UK Treasury's rescue of its parent bank, HBOS in September 2008.

Now the primrose is in bloom and BOSI is preparing to shut down its retail brand, Halifax, in September following explicit instructions from London to cease lending in Ireland and repatriate €20bn of its €35bn in Irish assets under the UK Government Asset Protection Scheme (GAPS).

The disappearance of Halifax is just one of several moves underway by foreign banks to dramatically reduce their commitment to the Irish market.

• Ulster Bank, the Irish subsidiary of Royal Bank of Scotland, which is now 70% owned by the British government, is in the process of closing 45 First Active retail branches around the country and folding the brand into Ulster. The changes will result in 750 redundancies. But this might not be the end. RBS last month made a €300m capital injection into Ulster – not to support new business, but to absorb expected losses. Ulster is known to have bankrolled developer Sean Dunne, whose €400m Ballsbridge development project is dead in the water. Brokers say the bank is out of the mortgage business, but bankers from competing institutions say the bank is still working hard to get deposits.

• National Irish Bank has put its branch expansion plans on hold while it has begun consolidating parts of its existing network, the bank confirmed to the Irish Independent last week. Banking sources say NIB is the most committed of the foreign banks in the Irish market, but that commitment has also caused headaches for Danske Bank, its Danish owner. Analysts say Danske will post a €270m loss for 2009, much of it due to bad loans at NIB.

• ACC Bank, the Irish business-banking and mortgage arm of Dutch mutual Rabobank, revealed in April a net loss of €244m after recognising €373m in loan losses, mostly to commercial investment and property development. In May, ACC announced it would close 16 of its 25 branches around the country and eliminate 200 jobs – nearly a third of its workforce. The bank remains in discussions with staff over the restructuring proposals after unions reportedly rejected the bank's plan to fire its entire staff and have them re-apply for two-thirds of their original positions. The bank announced the closure of its asset-finance division last Friday.

At first glance the withdrawal of British and other foreign-owned banks from the Irish market appears to be good news for the domestic banks that remain viable.

Ulster Bank and Bank of Scotland Ireland were especially troublesome to AIB and Bank of Ireland during the boom, between them introducing market-leading products such as the 100% mortgage and the tracker mortgage, respectively.

Foreign lenders also became significant players in property development, forming part of the mad stampede behind Anglo Irish Bank.

However, according to informed government sources, officials in the Department of Finance are worried that the retreat of foreign banks from Irish lending will leave a large chunk of the market completely unserved, as even the domestic banks covered by the government guarantee scheme still cannot raise enough funding to pick up the slack.

Worse, these banks are not leaving Ireland entirely. They are reducing lending activity, but are still very interested in deposit-taking. After all, extra liquidity helps the home institution, while lending is just another risk to fund.

Foreign-owned banks, such as National Irish Bank, ACC and KBC, as well as BOSI and Ulster, have already effectively priced themselves out of the once-lucrative mortgage market, according to brokers. But even though domestic banks AIB and Bank of Ireland have both increased their market share significantly as a result, volumes are still extraordinarily low.

That's because the domestic banks, apart from having difficulty sourcing additional funding, have a lot of resources tied down in credit control and loan restructuring, leaving little capacity (or appetite) to gobble the potential business volumes.

Three key factors are at work in the retreat of foreign banks from Irish shores.

The first is the bank guarantee scheme, which protects the seven domestic institutions, but leaves out foreign-owned banks. The resulting two-tier system has had a couple of major consequences. After the scheme came into effect last autumn, depositors flocked to the covered Irish banks leaving the foreign banks with giant funding holes in their balance sheets, which effectively made it impossible for them to lend.

Secondly, the government has had to double-down on its commitment to cover domestic bank liabilities by recapitalising three institutions (so far) and creating Nama to deal with the bad assets, giving AIB and Bank of Ireland a major competitive advantage in the market

According to EU rules, the foreign banks had the option to participate in the guarantee scheme, but opted out to avoid Irish government input into their businesses. Instead, the foreign banks accepted rescue packages from their home governments, which brings us to the third factor: economic nationalism.

Just as the Irish government is putting pressure on domestic banks to pull back from foreign markets – for example, AIB in Poland and Bank of Ireland in the UK – foreign governments which are supporting banks in the Irish market want their charges to either shrink or get rid of non-core assets.

Interestingly, these policies are explicitly supported by the EU. Last month, competition commissioner Neelie Kroes warned HBOS and RBS they might have to make "significant divestments" to stay on the right side of state aid rules. So the 'nationalism' is really just a way for members states to remain in good standing with the common EU market.

Most commentators now agree the Irish banking landscape will look much different by 2013, when the EU says government support for banks must end. The emerging picture has a place for AIB and Bank of Ireland and a large third competitor, most likely some combination of EBS, Permanent TSB and part of Irish Nationwide.

The main question will be whether they will be strong enough by then to build size and strength from all the potential business left behind by their erstwhile foreign rivals.

Halifax the main target of Primrose

Project Primrose is a secret Bank of Scotland Ireland (BOSI) programme, started under former chief executive Mark Duffy last autumn, to assess the viability of the entire Irish business in light of the UK treasury's rescue of parent bank HBOS.

That rescue put BOSI under the command of two new masters: Lloyds, the bank which acquired HBOS, and the UK treasury, which ultimately underwrote the deal with a recapitalisation and an asset protection scheme, called GAPS.

BOSI executives understood early on that this arrangement could result in less support for the Irish operation, as the UK taxpayer had essentially become the business's main benefactor after the government took a 43% stake in the merged entity. Now that the UK treasury has told Lloyds to repatriate €20bn of its €35bn in Irish assets, Project Primrose is being put into action. The main task will be the shutdown of its retail business, Halifax, which grew from virtually nothing in 2006 into a serious challenger brand, gobbling up current accounts, savers and mortgage borrowers from the back books of the major incumbents, like AIB and Bank of Ireland.

This, combined with the transfer of its troubled property lending business, will effectively gut BOSI – a situation which has led to a rift in the executive committee and high-level departures, including retail chief Antoinette Dunne two weeks ago, according to informed sources.

As others depart, nationwide UK moves in

One UK financial institution is moving in the opposite direction to its peers and looking to expand its presence in Ireland.

Nationwide UK (Ireland), the Irish subsidiary of the world's largest building society, is preparing to move into branch-based retail lending just months after taking its first deposits in the Irish market.

The mutual is known to have scouted locations in Dublin and Cork to set up branched-based banking – a sign it is preparing to test the waters in the lending market. Informed sources said the building society could be offering mortgages by the middle of next year.

Nationwide has come through the banking crisis virtually unscathed. The mutual has suffered no asset writedowns, remains profitable and has stayed free of UK government support, unlike big banks RBS and HBOS. It has an exceptionally high core Tier 1 capital ratio – 12.1% – and funds 72% of its lending directly from retail deposits, unlike banks in the Irish market which became dependent on wholesale funding.

The building society set up in Ireland originally to get access to emergency funding from the European Central Bank (ECB), but now is taking advantage of the disarray in the local market to expand. Its treasury department is active in the local interbank market, too, and has completed several short-term repo "test" transactions with the ECB to supply contingent liquidity.