Turnaround specialist Cerberus had made a swoop for troubled Co-op Bank just months after the lender's fifth chief executive in less than a decade quit.
Sources told The Telegraph that the New York-based private equity giant had approached the bank after the lender confirmed it was in talks with a mystery buyer on Tuesday morning.
Co-op Bank promotes itself as an ethical alternative to big lenders. However Cerberus, which has stakes in major financial institutions including Deutsche Bank, was in 2018 accused of misleading the Government on a deal to buy £13bn worth of mortgages from bust lender Northern Rock.
A takeover of the Manchester-based bank, which has been in recovery mode since 2013 when staff found a £1.5bn hole in its balance sheet, has long been on the cards.
After a failed attempt to find a buyer in 2017, when Cerberus also considered a deal, the lender agreed a £700m rescue deal with its US hedge fund owners, four of which were involved in its 2013 bailout. The plan meant it cut historic ties with the wider Co-operative Group.
Just over a year later, it is believed to have approached Barclays, but talks never progressed beyond the exploratory stage. Takeover interest was revived last December when the bank's owners reportedly hired Goldman Sachs to sound out buyers.
The move was said to be at odds with the views of the board, although former chief executive Andrew Bester was reportedly part of informal talks with several big banks. He insisted earlier this year that he was not thinking about consolidation and quit in October.
The bank has struggled to revive its fortunes since 2013, when chairman Paul Flowers, the ex-Methodist minister dubbed the “Crystal Methodist”, quit in the wake of an explosive drugs scandal. Attempts to revive its fortunes have been slow moving and progress has been hampered by the coronavirus crisis.
John Cronin, a bank analyst at Goodbody, told The Telegraph in October that M&A was "the only solution for Co-op Bank. It can trundle on but the hedge funds [which own it] are likely to be getting a little bit impatient".
Supermarket banks have struggled to compete with big lending giants despite the fact confidence in large lenders crashed after the 2008 financial crisis.
Sainsbury's said it had received preliminary interest in its bank, following reports earlier in the week that taxpayer-backed NatWest was among possible suitors.
Cerberus declined to comment.