The EU approved on Monday Spanish lender Sabadell's £1.7-billion (2.3-billion-euro) takeover of TSB, a unit of Britain's bailed-out lender Lloyds.
Competition Commissioner Margrethe Vestager said the deal announced in March would not breach the European Union's state aid rules.
Lloyds, which is 23-percent state-owned after a bailout at the height of the global financial crisis, is selling its remaining 50-percent stake in TSB, which it floated on the London stock market last year.
"Lloyds' recent progress, including the sale of its stake in TSB approved today, shows the effectiveness of EU state aid rules," Vestager said in a statement.
"Lloyds was able return to normality following the state support received.
"The Commission worked together with UK authorities to design a restructuring plan that ensured Lloyds' long-term viability and limited distortions to competition created by the aid."
The takeover strengthens Spain's hold on British banking following rival Santander's acquisition of Abbey, Alliance & Leicester and parts of Bradford & Bingley.
Sabadell is Spain's fifth-largest bank and also has a presence in the United States. TSB is the eighth biggest lender in Britain, where it has 631 branches and 4.5 million customers.
But the European Commission, the executive arm of the 28-nation EU, said that Sabadell's backing would "enhance TSB's ability to compete" and "stimulate competition in the British retail banking markets."
The EU has tight rules on the amount of state aid that companies can receive in order to preserve free trade within the bloc.