Merger creates Italian bank giant

Sanpaolo bank is joining forces with Intesa

Two of Italy's biggest banks are to merge, forming an industry giant with a market value of 55bn euros (£37bn).

The merger of Banca Intesa and rival Sanpaolo IMI will create Europe's 10th largest bank.

The move, which is backed by both banks' shareholders and the Italian state, has renewed speculation over a wave of possible European bank mergers.

The combined operation would dominate the domestic market, with twice as many branches in Italy as its nearest rival.

Intesa and Sanpaolo are currently Italy's second and third largest banks.

National factors

The deal marks a victory for Bank of Italy governor Mario Draghi, who was appointed last year after his predecessor resigned in a row over protectionist policies in Italian banking.

Mr Draghi has been a supporter of consolidation among Italy's numerous retail banks.

His predecessor, Antonio Fazio, was accused of favouring an Italian bidder over Dutch bank ABN Amro during a takeover battle for Italy's Antonveneta bank in 2005.

The scandal which precipitated Mr Fazio's resignation damaged the reputation of Italy's banking regulators. A successful merger between Intesa and Sanpaolo would prove that real changes are taking place.

Foreign shareholders, including French bank Credit Agricole and Spain's Santander, are key to the success of the deal.

Intesa and Sanpaolo are expected to reveal details of the tie-up after meetings on Saturday.

Other Italian banks are also believed to be attempting to form new merged identities.