Federal Treasuer Jim Chalmers has given the green light to the merger of the Greater Bank and Newcastle Permanent Building Society.
The proposed new entity would become Australia's largest customer-owned bank with assets valued at $19.8 billion and a customer base of 600,000.
Dr Chalmers said Treasury's sign-off was based on advice provided by financial regulators on Friday.
"The proposed merger is expected to support competition and innovation in the banking sector by allowing these customer-owned banks to better compete with the larger players and deliver higher quality products and services to members," Mr Chalmers said.
The two institutions have given a guarantee that there will be no forced redundancies or branch closures for at least two years following the merger.
The final step of the merger process is the endorsement of members.
Members will receive information booklets about the proposal prior to a vote, which is expected to occur in November.
"We are not doing an NIB, we are not going to our members and trying to turn into a public company. We don't need that, we are not short of capital, to go and make ourselves a public company would take away the very essence of all the things that make us great," Mr Eather said.
Despite that, some members remain concerned about the merged entity's long-term future.
Banking and finance expert Professor Jerry Parwada from the University of NSW's business school previously said the merger made sense from a strategic perspective.
"I can understand the concerns of individual customers, but in terms of the system, we need to consider everything against the dominance of the big four banks (Commonwealth, Westpac, NAB and ANZ)," he said.
In order to put the size of the new entity in perspective against the big four banks Professor Parwada said the combined assets of Australia's customer owned banks represented about 14 per cent of the value of the smallest of the big four banks.
The Finance Sector Union previously welcomed the moratorium on job cuts but said it remained concerned about the future role of retail branches.
"The mutual sector has been contracting in the last decade as small mutual banks continue to amalgamate in order to meet the tight regulatory framework leaving fewer small member owned services that can tailor their services to the needs of the community," Finance Sector Union National secretary Julia Angrisano said previously.
"In the last 18 months the big four banks have abandoned local and regional communities with large numbers of branch closures. These communities rely on the mutual sector to provide them with low cost banking services that aren't driven by the need to maximise profit, and it is of great concern when member owned banking services aren't acting in the interests of their members"
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