Any bank merger in Germany must create a competitive lender, the head of the Bundesbank says, per Reuters

FRANKFURT (Reuters) – Any German banking merger must create a competitive institution strong enough to support economic growth, Bundesbank chief Joachim Nagel said on Wednesday, just as UniCredit plans a takeover of Germany’s Commerzbank (ETR: ).

Italy’s second-biggest bank took a 9% stake in Commerzbank last week, catching German authorities off guard and receiving a hostile reception from local management who want to avoid any takeover attempt.

It will now be up to the European Central Bank whether to allow UniCredit to increase its stake, so any comment from the Bundesbank – whose representative sits on the ECB’s Supervisory Board – is likely to be closely scrutinised.

“We need strong and robust banks so that companies can tackle and finance their future tasks,” Nagel told a Commerzbank event in Frankfurt.

“In the case of possible mergers, it is important to create a competitive institution that fulfills this task as well as possible,” Nagel said, without any specific reference to any of the lenders.

UniCredit is among the best capitalized banks in Europe, with a Common Equity Tier 1 or CET1 ratio of 16.2% at the end of the first half, despite a generous dividend and share buyback program.

This would suggest that UniCredit has the financial capacity to engineer a viable takeover.

However, any deal is likely to be politically charged as Germany’s banking sector is dominated by two large institutions: Deutsche Bank and Commerzbank.

Selling Commerzbank to UniCredit would increase competition for Deutsche Bank and leave Commerzbank under foreign control, a potentially sensitive issue for a government facing elections next year.

However, the ECB has repeatedly expressed support for cross-border mergers to improve European banking competitiveness, so the watchdog is unlikely to block the deal if UniCredit can present a plan that creates a financially sound megabank.