Under the terms of the deal, Banco Popolare Italiana (BPI) will pay â¬8.2 billion for Banco Populare di Verona e Novara. The boards of both banks are expected to approve the agreement in December this year.
The agreement will create the largest mutual bank and the third largest retail bank in the country, with a market value of over â¬15 billion, 2,183 branches and a 6.7 per cent share of the total Italian banking market.
BPI has been seeking a merger partner since last year, after the bank was accused of collusion with the Italian central bank over a failed bid for Banca Antonveneta that led to the departure of chief executive Gianpiero Fiorani.
The agreement between BPI and BPVN follows the announcement last week by Sanpaolo IMI and Banca Intesa that they planned to merge, creating the largest bank in Italy.
The consolidation of the Italian banking market follows calls by Bank of Italy governor Mario Draghi for banks to merge in order to ensure they are able to compete with larger rivals in France, Germany and the UK.