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The owner of Clydesdale Bank and Yorkshire Bank, CYBG, has made a takeover approach for Virgin Money which values the lender at £1.6bn.

A combination of CYBG and Virgin Money would create the largest "challenger bank" to the UK's biggest lenders.

It would have six million personal and business customers and a balance sheet of between £60bn and £70bn.

CYBG said it would keep the Virgin Money brand, subject to an agreement with Richard Branson's Virgin Group.

Virgin Money confirmed that it had received a preliminary approach from CYBG on Monday evening and that its board was "in the process of reviewing this proposal"

It added that there was "no certainty" a formal offer would be made.

Virgin Money, which was founded in 1995, expanded its business in 2011 when it bought the remnants of Northern Rock for around £747m.

Virgin Money's share price rose by 7.7% to 336.6p while shares in CYBG 1% to 321.4p.

CYBG said it believed that a tie-up of the two businesses "would create the UK's leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks".

Commenting on the proposed deal, Thomas Moore, investment director for UK equities at Aberdeen Standard Investments, told the ´óÏó´«Ã½'s Today programme: "The big mainstream banks have got huge cost advantages and it is important that there is strong competition for customers and this kind of deal will help ensure that."

Mr Moore said it was "possible" that the proposed takeover could trigger a wave of deals among other challenger banks.

"What the UK needs is strong competition between strong banks," he said.

"If you have too many small lenders... without the scale economies that the likes of Lloyds and RBS has, then you'll find that the competitive environment is too tilted in favour of those big mainstream banks."

CYBG

Virgin Money

Sir Richard Branson's Virgin Group is Virgin Money's biggest shareholder with a 34.8% stake in the business, which, under CYBG's proposal, makes the holding worth about £560m.

Mr Moore said: "It is an all-paper offer so Sir Richard Branson will be receiving shares in the enlarged organisation, but I think he will be aligned with other shareholders in wanting a strong Virgin Money."