Confirming weeks of speculation, on Sunday the senior management of Deutsche Bank and Commerzbank announced they have begun exploratory merger talks after the executive boards of Germany’s two largest listed lenders agreed to evaluate the benefits of a tie-up. The decision to start formal talks was taken by the boards on Sunday after the German government signaled over the weekend that it would support the restructuring needed to make a success of the tie-up.

“We confirm that we are engaging in discussions with Commerzbank,” Deutsche Bank said at midday on Sunday in a regulatory statement, adding that “there is no certainty that any transaction will occur”. Similarly, Commerzbank informed investors that both lenders “have agreed today to start discussions with an open outcome on a potential merger”.

A detailed due diligence process would commence next week when the banks would set up a number of committees to explore specific questions the FT reported, noting that talks would start immediately.  The Wall Street Journal and other media previosuly reported earlier that the two lenders’ chief executives were speaking about a potential deal, with the WSJ adding that the German finance ministry stands ready to support a deal.

The announcements signaled that discussions between the two banks that already had started informally are entering a new phase. German securities laws require companies to disclose publicly information material to investors about potential deals when talks reach a certain threshold, such as formal endorsements by senior bank officials. Deutsche Bank’s management board was expected to talk in a meeting scheduled for this morning about various options for the bank, including a potential merger with Commerzbank, people close to Deutsche Bank said.

And while the banks had considered a merger for years, under different CEOs, previous talks ended before any formal announcements were made.

While the exploratory talks “won’t be over in a week”, the FT quoted a source who said the protracted negotiations over a deal that would create the eurozone’s second-largest lender after BNP Paribas, with €1.9tn in joined assets and more than 140,000 employees.

In a note to employees published, Deutsche Bank chief executive Christian Sewing said: “we will only pursue options that make economic sense”. Sewing also said executives have a responsibility to consider options like possible mergers. He asked employees to stay focused on clients, adding that no deal is certain. “Experience has shown that there may be a lot of potential economic and technical factors that could hinder or prevent such a step,” Sewing said in his note.

Yet while investors will likely cheer a tie up between Germany's two biggest banks, the labor unions are hardly excited. The German service sector union Verdi, which opposes the deal, expects that in a worst-case scenario, up to 30,000 jobs would be cut. “I think that’s a realistic number,” a senior manager at one of the banks told the FT, adding that he saw no outlook where...