Germany is attempting to frustrate a possible takeover of Commerzbank, one of its largest banks, by Italian rival UniCredit, according to sources familiar with government and regulatory thinking.

As per Reuters, Berlin was caught off guard by UniCredit's move to build a substantial stake in the state-backed Commerzbank, which the Italian bank has indicated could lead to a merger. German officials are now preparing for a potential hostile bid that could tie Germany's financial fortunes to those of Italy, which has a significantly larger debt burden.

The Reuters report notes that several people within the German government are pinning their hopes on a regulatory review by the country's financial supervisor BaFin, lobbying the regulator against the deal. One key argument is that Berlin might end up footing the bill if UniCredit were to be dragged into an Italian debt crisis.

BaFin has begun analysing UniCredit's request to increase its roughly 9.9 per cent shareholding in Commerzbank to almost 30 per cent. The watchdog will make a proposal to the European Central Bank (ECB), which has the final say on the matter.

While Rome cautiously supports the deal, Berlin hopes its concerns may thwart or at least delay the ECB's approval of UniCredit's plan. However, sources with knowledge of the ECB's thinking say there is widespread disagreement with Germany's opposition.

At the heart of Germany's concern is UniCredit's 40 billion euro holding of Italian government bonds. Commerzbank, which is smaller and financially weaker than UniCredit, also has billions of euros of Italian bonds.

Frederik Werning, a Verdi labour union official and member of the Commerzbank supervisory board, expressed opposition to any cross-border merger for Commerzbank. He told Italian broadcaster La7: "When a merger happens every time they say that nothing will change but one out of two times they don't keep their promise and jobs would be lost both in Germany and in Italy."

The ECB's handling of UniCredit's interest in Commerzbank, balancing the interests of two of the eurozone's biggest economies, will be one of its biggest tests since becoming the region's main watchdog a decade ago.

Claudia Buch, the ECB's chief supervisor, recently stated that the institution would do "anything" to remove hurdles to cross-border bank mergers, after president Christine Lagarde described such deals as "desirable".

As the situation unfolds, the banking sector and financial regulators across Europe will be closely watching the outcome of this potential cross-border merger and its implications for the future of European banking integration.

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