Germany’s two biggest lenders, Deutsche Bank and Commerzbank, will hold formal talks about a merger.
The announcement caps months of speculation that the two struggling banks would attempt to combine.
A merger could result in massive cost savings, in particular by closing branches. But critics say integrating the firms would be complicated and risky.
The German government appears to favour a deal.
Deutsche Bank has been struggling to generate growth and has been hampered by losses at its US investment banking operations.
“What is also important to me is that we will only pursue options that make economic sense, building on the progress we made in 2018,” chief executive Christian Sewing said in a letter to employees.
Unions fear that more than 10,000 jobs could be cut as a result of the deal.
Commerzbank has also been struggling to generate growth.
The German government still owns a 15.5% stake in Commerzbank, acquired after it bailed it out following the financial crisis.
Both banks are also facing a slowdown in the Eurozone and last year the German economy narrowly avoided falling into recession.