At face value, there is little to prevent UniCredit from acquiring Commerzbank, if that is its intention – there has been some speculation that UniCredit would like to merge HVB with Commerzbank and emerge with control, but not full ownership, of the enlarged entity.

Germany, having handed over its regulatory functions to the ECB, doesn’t have the authority to veto a merger.

That power lies with the ECB, which has been keen to promote consolidation of Europe’s highly fragmented banking sector.

The ECB has to approve any interbank shareholding of more than 10 per cent (hence UniCredit’s use of derivatives) and would also have to clear any transaction that could lead to a change of control of Commerzbank.

While Draghi and the ECB see consolidation of the banking sector as a key ingredient in the policy mix required to improve Europe’s competitiveness, which generally involves far more cross-border harmonisation and integration and, in the case of banking, a pan-EU deposit guarantee scheme, politicians are reluctant to lose control of their major financial institutions.

In the absence of a deposit insurance or guarantee scheme throughout the EU, they worry, understandably, that a bank’s crisis would leave their depositors at risk and the local government on the hook politically and financially.

UniCredit’s tilt at Commerzbank is seen as a big moment for European banking more broadly. If it can acquire Commerzbank, or at least merge HVB into it and have effective control, it could open the doors for a flurry of European banking consolidations.

Memories are fresh. After the financial crisis governments across Europe were forced to bail out their banks with taxpayer funds. Commerzbank, along with its far larger peer, Deutsche Bank, was one of those rescued by taxpayers, hence the government’s shareholding.

Indeed, Orcel was a key adviser in the acquisition and carve-up of ABN Amro by Royal Bank of Scotland, Belgium’s Fortis and Spain’s Santander pre-crisis that ended up with ABN, RBS and Fortis nationalised by their governments. No European politician wants to risk a repeat of those events.

The broader view, however, is that many of Europe’s banks – most of them – are too parochial.

They are, with a few exceptions (like Germany’s Deutsche Bank) domestic banks, with concentrated exposures to their own economy and, usually, to substantial holdings of their own government’s bonds that, in effect, leverage their exposure and that of the government’s) to the domestic economy and financial system.

The ECB and those, like Draghi, fully committed to the “European Project” believe that pan-European banks would create greater diversity, and therefore reduce concentration risk, while also building the scale and bigger pools of capital that would enable the EU to compete with its international rivals.

Bigger and more diverse European banks might also help larger financial markets to develop, reducing Europe’s over-reliance on banks for capital. Other economies, most notably the US, source far more of their private capital – particularly for perceived higher-risk investments, like technology – from financial markets.

An oft-asked question in Europe is why is the market capitalisation of JPMorgan Chase, America’s largest bank, roughly equivalent to the combined market caps of Europe’s 10 largest banks?

It was a question asked by Draghi, who bemoaned European banks’ lack of scale and poor profitability relative to their US counterpart in his report. Scale, diversification and the greater profitability that greater efficiency could generate enable greater risk-taking.

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It’s the parochialism, risk aversion and the politicians’ fixation with national champions, particularly after the trauma of the eurozone crisis post-2008, that have inhibited European bank mergers and acquisitions activity.

UniCredit’s tilt at Commerzbank is seen as a big moment for European banking more broadly. If it can acquire Commerzbank, or at least merge HVB into it and have effective control, it could open the doors for a flurry of European banking consolidations.

If it fails because of domestic opposition, the banking sector will remain fragmented, all but a handful of banks within Europe sub-scale and low-returning and the vision that Draghi and others have of a more integrated union, in which a banking union is a foundational piece, will be much harder to realise.

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