Greece's Piraeus Bank will absorb part of ailing state lender ATEBank which will be broken into performing and non-performing assets, the Bank of Greece said on Friday.
"The Bank of Greece, with a view to safeguarding the deposits and the financial stability in general, proceeded to transfer the sound part of the Agricultural Bank of Greece to Piraeus Bank," the central lender said.
Founded in 1929, the former Agricultural Bank has a network of nearly 500 branches but is held down by ailing subsidiaries such as the Hellenic Sugar Company and the Greek Cooperative Cigarette Manufacturing Company (SEKAP).
It failed Europe-wide stress tests held in 2010 and 2011.
The Bank of Greece said that ATEBank's license had been revoked and that a special legal provision would be put in place for non-performing loans backed by agricultural land as collateral.
The "sound" part absorbed by Piraeus "comprises mainly the performing loans and securities portfolio, as well as the full amount of all of the bank's deposits," the central bank said.
"With the procedure that has been implemented, the deposits of all customers are secured in their entirety and the smooth continuation of business is ensured," it said.
Any subsidiaries not transferred will be managed by the Greek state.
The country's fourth-largest lender, Piraeus Bank last year tabled a 701-million-euro ($867 million) cash bid for 77 percent of ATEbank and the Greek state's 34-percent stake in Hellenic Postbank, but a deal did not materialise.
Piraeus Bank on Friday said the combined group will have 75 billion euros in total assets, 35 billion in customer deposits and 47 billion in loans.
The staff union of ATEBank this month said the lender had already carried out an overhaul from 2010 that restored its capital base but took a major blow from having to join a writedown of Greek sovereign debt.
And in contrast to private Greek lenders, who will receive 50 billion euros to recoup losses, ATEBank was entirely left out, they add.
"This is a hatching scandal," the union said in ads earlier in July.
Announcements on the bank's 2011 annual results have been held back until the end of August, and no announcements have been released for 2012.
Greece's banking sector has been urged to consolidate to bolster its defenses and help liquidity as the country's economic crisis continues for a third year.
Its number two and three lenders, Alpha Bank and Eurobank tried to merge last year before Alpha pulled out, citing adverse effects of the debt rollover.