Both the banks have inked a Memorandum of Understanding (MoU) to this effect.
The combined company, DZ Bank, is said to become the third largest bank in terms of total assets after Deutsche Bank and Commerzbank, The Wall Street Journal reported.
The joint central institution is scheduled to be launched on 1 August 2016.
WGZ Bank and DZ Bank expect to achieve direct earnings and cost synergies of at least €100m every year from the new entity with over 1,000 cooperative banks.
Commenting on the merger, WGZ Bank supervisory board chairman Werner Böhnke said: "The planned merger is based on the stable foundation, where both institutions focus consistently on the cooperative banking network, and on their successful cooperation that has been intensified in recent years.
"Furthermore, both banks have successfully passed the comprehensive assessment conducted by the European Central Bank in 2014. This increased level of trust will now allow us to take this major step forward with confidence and in the interest of our organization."
Said to be the fourth largest bank in Germany by asset size, DZ Bank has more than 900 co-operative banks and 12,000 branch offices. It functions both as a central institution and as a corporate and investment bank.
With 230 cooperative financial institutions, WGZ Bank offers long-term real estate loans; services for the international currency financing business with member banks; and investment analysis and asset management services for private clients, as well as custodian for a number of funds in Luxembourg.
It also acts as a trading partner in currency, foreign exchange, and capital markets, as well as in bond issuing and syndications.
Wolfgang Kirsch and Hans-Bernd Wolberg will be appointed as the CEO and deputy CEO of the combined company.
Image: DZ Bank headquarters in Frankfurt, Germany. Photo: courtesy of Brazzy / Wikipedia.
