City analyst Sandy Chen of stockbroker Panmure Gordon is the driving force behind the plan for a new institution backed by his employer, which is acting as adviser.

Burt could not be reached for comment yesterday, but it is understood that while he is the leading contender for the position of chairman of the as-yet-unnamed bank, a deal has not been signed.

It was reported at the weekend that the bank could raise around £100m through a stockmarket listing in a launch later this year.

The new bank is expected to target affluent individuals, offering higher interest rates than existing retail banks.

It would then use the funds to lend to the sorts of medium-sized businesses that have been struggling hardest to secure funding during the credit crunch.

Chen has even gone as far to approach Royal Bank of Scotland with informal offers to buy its smaller private banks including Edinburgh-based Adam & Co, Drummonds and Child & Co.

Although he retired as deputy chairman of Halifax Bank of Scotland in 2003, Burt returned to prominence last year as his beleaguered former bank was taken over by Lloyds TSB in a government-brokered takeover.

Burt and former Royal Bank of Scotland chief Sir George Mathewson were behind attempts to keep HBOS out of Lloyds’s hands, arguing that the Edinburgh-based bank was being bought on the cheap.

They even went so far as to launch a shortlived campaign for shareholders to install them as chairman or chief executive but failed to secure the backing of major investors.

Burt was later scathing about the failure of his successors to keep the bank’s balance sheet under control after Halifax’s takeover of Bank of Scotland in 2001.

He told The Herald in February: “In the last few years they just blew their balance sheet out like a balloon.”

He went on: “They just got it wrong . . . They just got greedy.”

The Government is extremely keen to encourage new banks into the shrunken UK market.

As well as the merger of Lloyds TSB and HBOS, Bradford & Bingley was nationalised, with its savings arm sold to Santander. The Spanish bank also took over Alliance & Leicester.

Most damagingly, a number of foreign lenders, notably from Ireland, have withdrawn from the UK market. This has reduced the amount of lending available to UK individuals and businesses.

Visiting rapidly expanding Tesco Personal Finance’s Edinburgh offices last month, Chancellor of the Exchequer Alistair Darling said: “We do need more competition in the system. The last couple of years has seen a significant reduction in the number of people, both from abroad and British-based banks, who are lending into the market. We need more competition and that’s something that we intend to encourage.”

Chen has been among the most bearish of City analysts about the UK banking system and has continued to warn that many UK institutions have not written down the value of their most toxic loans and investments sufficiently.

He has also cautioned that banks are going to struggle to maintain revenue growth in the coming years.

But he is not the only person attempting to launch a new retail bank at the moment.

Sir Richard Branson’s Virgin Money is thought to be working on plans to get a full banking licence.

Meanwhile, American banking entrepreneur Vernon Hill approached regulators a year ago about creating a new venture called Metro Bank.