Commerzbank is to take control of German mortgage lender Eurohypo in a 4.5bn euro ($5.3bn; £3bn) deal.
Eurohypo is a market leader in real estate funding
The deal, which will see Commerzbank buy out other investors Deutsche Bank and Allianz, will create Germany's second largest listed bank.
Eurohypo supplies loans for commercial property and retail developments, also funding public works such as new roads.
Commerzbank is to raise 1.25bn euros towards the deal by selling more than 57 million new shares to investors.
Commerzbank already owns about a third of Euroypo and by buying out its fellow shareholders, it will ultimately own about 98% of Eurohypo.
Eurohypo was formed in 2002 by a merger of the mortgage operations of Commerzbank, Dresdner and Deutsche Bank.
The deal - which must be approved by the German banking authorities - will be the largest in the German banking sector since the 24bn euro takeover of Dresdner by Allianz in 2001.
Some analysts have expressed caution about the deal, given the scale of the rights issue, but Commerzbank shares rose 0.2% in early trading.
"Eurohypo is a good business," Thomas Koerfgen, a fund manager with SEB, told Reuters.
"A capital increase is good if it results in more profit for Commerzbank."