UPDATE 2-Sainsbury's seeks full control of banking arm
* Sainsbury in talks to buy out Lloyds' 50 pct stake
* Deal would give Sainsbury full control of bank
* Retailers looking to take on UK's unpopular banks
* Lawmakers keen to encourage competition in industry (Recasts, adds detail, background)
By James Davey and Matt Scuffham
LONDON, May 7 (Reuters) - British grocer J Sainsbury plans to take full control of its joint venture with Lloyds Banking Group, treading the same path as rival Tesco, as grocers seek to capitalise on the unpopularity of traditional banks.
Although many Britons blame banks for the country's economic problems and lawmakers are keen to encourage greater competition, the 'big 5' - Lloyds, RBS, Barclays, HSBC and Santander UK - control 83 percent of current accounts as customers have been reluctant to switch.
Sainsbury's sells products such as loans and insurance to about 1.4 million of its 20 million weekly grocery customers and Marks & Spencer is the only retailer to offer current accounts, charging a monthly fee.
But Sainsbury could copy Tesco's plans to launch current accounts after Britain introduces new rules later this year designed to make it easier for customers to switch.
Tesco, whose credit cards account for 12 percent of UK credit card transactions, plans to launch current accounts in 2014 after the new system is introduced.
"The transaction could pave the way for Sainsbury being able to offer a wider range of products to its existing customers in line with the move by Tesco," said Espirito Santo Investment Bank analyst Caroline Gulliver.
Britain is keen to stimulate competition within the industry after scandals such as the mis-selling of loan insurance and the rigging of interest rates have eroded confidence in banks.
A parliamentary committee is set to put competition at the heart of its recommendations to improve standards within banks when it reports its findings later this month.
The 2013 World Retail Banking Report from Capgemini found that although more than half of customers were unsure if they would stay with their main bank in the long term, only one in ten planned to switch in the next six months.
Retailers have a head-start over potential newcomers with an established customer base, premises and the ability to offer longer opening hours than traditional banks.
CAPITAL BOOST FOR LLOYDS
Sainsbury's, which became the first major British supermarket to obtain a banking licence in 1997, is scheduled to publish 2012-13 results on Wednesday when the deal with Lloyds could be confirmed. Lloyds and Sainsbury declined to comment further.
Sainsbury's said on Tuesday it was in talks to buy Lloyds' 50 percent stake, mirroring market leader Tesco's acquisition of RBS's stake in Tesco Personal Finance five years ago and 10 months after Marks & Spencer launched banking services with HSBC.
The deal is expected by analysts to raise in the "low hundreds of millions" of pounds for state-backed Lloyds.
Lloyds' planned sale of 630 branches to the Co-op fell through and it is waiting to hear whether it will needs to raise cash after the Bank of England identified a 25 billion pounds shortfall at UK banks.
Britain's biggest-mutually owned business, the Co-operative, offers banking alongside its other businesses but the bank has struggled recently.
In the six months to Sept. 29 Sainsbury's share of Sainsbury's Bank post-tax profit increased by 5 million pounds to 12 million pounds, driven by car and home insurance business.
Tesco Bank's trading profit fell 15 percent to 191 million pounds in the 2012-13 year.
Shares in Sainsbury were 0.6 percent at 393 pence at 1445 GMT. Shares in Lloyds were up 1.9 percent. (Editing by Elaine Hardcastle)