The government is leaning towards including Anglo Irish Bank as the business banking component in the mooted "third force" bank with Permanent TSB, Irish Life & Permanent's (IL&P) banking arm, after the nationalised lender sheds its bad development loans and shrinks its remaining assets down to a core of Irish commercial business, informed sources said.

The consolidation, expected to take place within the year, may also exclude EBS and Irish Nationwide, which are currently in merger talks.

The two building societies had been widely expected to be part of the new entity, but may be kept separate to retain an element of cooperative banking in Ireland.

The rough outline being discussed involves combining Anglo's commercial lending infrastructure with Permanent TSB's expertise in transactional banking. Once Anglo is relieved of €28bn in Nama loans and sells its viable US and UK portfolios, analysts believe it will have a strong deposit base relative to assets, which would help solve IL&P's poor loan-to-deposit ratio.

Since taking over the Anglo chief executive position in September, Mike Aynsley has put together a business plan for the EU involving a split into 'good' and 'bad' banks, announced a staff and cost reduction programme and replaced much of the senior management, indicating the bank is gearing up for survival rather than wind down.

One senior banking source with knowledge of government intentions for the sector told the Sunday Tribune: "Everything about Anglo suggests it's going away, but everything it's doing tells you it's not."

But there are still significant hurdles to including Anglo in the final make-up of a third banking force, despite political enthusiasm for solving the problem of credit availability for SMEs.

One former senior banker pointed out Anglo's lack of expertise and distribution to the SME market after focusing so narrowly on development and commercial property finance, although banking analysts suggested this could be overcome with shrewd "cherry picking" of staff from competitors.

Other business banks have succeeded with a limited physical footprint as well, they pointed out, while AIB is even consolidating its business banking activities into smaller regional centres.

Perhaps more of an impediment is IL&P's longstanding cultural aversion to merging with Anglo. It is understood that even at this stage, with a new regime installed at Anglo, a tie-up with Anglo would be difficult for IL&P to sell to shareholders.