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 withLloyds Banking Group, treading the same path as rivalTesco, as grocers seek to capitalise on theunpopularity of traditional banks.

Although many Britons blame banks for the country's economicproblems and lawmakers are keen to encourage greatercompetition, the 'big 5' - Lloyds, RBS,Barclays, HSBC and Santander UK -control 83 percent of current accounts as customers have beenreluctant to switch.

Sainsbury's sells products such as loans and insurance toabout 1.4 million of its 20 million weekly grocery customers andMarks & Spencer is the only retailer to offer currentaccounts, charging a monthly fee.

But Sainsbury could copy Tesco's plans to launch currentaccounts after Britain introduces new rules later this yeardesigned to make it easier for customers to switch.

Tesco, whose credit cards account for 12 percent of UKcredit card transactions, plans to launch current accounts in2014 after the new system is introduced.

"The transaction could pave the way for Sainsbury being ableto offer a wider range of products to its existing customers inline with the move by Tesco," said Espirito Santo InvestmentBank analyst Caroline Gulliver.

Britain is keen to stimulate competition within the industryafter scandals such as the mis-selling of loan insurance and therigging of interest rates have eroded confidence in banks.

A parliamentary committee is set to put competition at theheart of its recommendations to improve standards within bankswhen it reports its findings later this month.

The 2013 World Retail Banking Report from Capgemini foundthat although more than half of customers were unsure if theywould stay with their main bank in the long term, only one inten planned to switch in the next six months.

Retailers have a head-start over potential newcomers with anestablished customer base, premises and the ability to offerlonger opening hours than traditional banks.

CAPITAL BOOST FOR LLOYDS

Sainsbury's, which became the first major Britishsupermarket to obtain a banking licence in 1997, is scheduled topublish 2012-13 results on Wednesday when the deal with Lloydscould be confirmed. Lloyds and Sainsbury declined to commentfurther.

Sainsbury's said on Tuesday it was in talks to buy Lloyds'50 percent stake, mirroring market leader Tesco's acquisition ofRBS's stake in Tesco Personal Finance five years ago and10 months after Marks & Spencer launched banking services withHSBC.

The deal is expected by analysts to raise in the "lowhundreds 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 toraise cash after the Bank of England identified a 25 billionpounds shortfall at UK banks.

Britain's biggest-mutually owned business, the Co-operative,offers banking alongside its other businesses but the bank hasstruggled recently.

In the six months to Sept. 29 Sainsbury's share ofSainsbury's Bank post-tax profit increased by 5 million poundsto 12 million pounds, driven by car and home insurance business.

Tesco Bank's trading profit fell 15 percent to 191 millionpounds in the 2012-13 year.

Shares in Sainsbury were 0.6 percent at 393 pence at 1445GMT. Shares in Lloyds were up 1.9 percent. (Editing by Elaine Hardcastle)