Shares of Deutsche Bank and Commerzbank surged on Monday after the German lenders confirmed they were in talks about a potential merger.
Commerzbank rose to the top of the pan-European STOXX 600, with shares gaining almost 7 percent, while Deutsche Bank shares were up nearly 4 percent. Over a 12-month period, shares of both companies are down by around 40 percent.
Talks are taking place following months of speculation, after Deutsche Bank CEO Christian Sewing reportedly withdrew his opposition to a deal. Media reports have suggested that the German government, which owns 15 percent of Commerzbank, is backing the deal – even though it could cause a multi-billion euro financial hole – because it would force the re-valuation of the lenders' assets.
Those financial pitfalls could also be passed on to Germany's workforce. German Chancellor Angela Merkel's chief of staff said Monday that the government was looking into potential job losses if a merger went ahead. According to German union Verdi, 30,000 jobs could be at risk, Reuters reported.
Despite confirming the talks were going ahead, a deal between the two banks is not guaranteed. In a statement on Monday, Jorg Eigendorf, group spokesman for Deutsche Bank, told CNBC: "It is important to us that… Deutsche Bank only engages in a transaction if it makes economic sense. Therefore, it needs a plan, it needs a detailed plan on the integration – we are now evaluating this with Commerzbank."
While markets speculated about merger talks between the two banks, many analysts criticized a potential deal, and have continued to look at the merger apprehensively.
Speaking to CNBC's Annette Weisbach on Monday, Stefan Mueller, CEO and founder of the German Institute for Asset Allocation, said he was "absolutely sure" a deal would happen soon despite the criticism.
"Nobody likes the deal," he said. "Sewing doesn't like it, his colleague at Commerzbank doesn't like it, Germany doesn't like it, the only person who likes it is the Minister of Finance Olaf Scholz."
Although he acknowledged it would benefit Germany if Deutsche Bank partnered with another domestic lender to create one strong German bank, Mueller said the deal with Commerzbank would create problems for both players.
"Let's say (it takes) three, four, five years (to complete the merger) – it will take their focus away from restructuring the banks and global challenges. The banking system as it is now won't be there in 10 years, and they (will) lose track," he said.
However, he added: "If they are able to just do the work and produce some good news here and there, then people will realize that this bank and this country has huge potential."
The merger has also faced criticism elsewhere in Germany since the talks were confirmed. Gerhard Schick, a former member of the German parliament, told Reuters he saw a "shaky zombie bank" being formed if the merger went ahead, while Hans Michelbach of Germany's Christian Social Union party urged the government to sell its stake in Commerzbank before the lenders merged.
However, RBS CFO Katie Murray told CNBC's "Squawk Box Europe" on Monday the British bank would support a deal if it strengthened Germany's banking sector.
"We welcome strength in banks and the reality is that the Deutsche Bank story has been a difficult one over the last number of years, so if this is what consolidates their positions and makes sure that the German banking industry is appropriate and strong then we're supportive of it," she said.