By Jennifer Clark

OF DOW JONES NEWSWIRES

MILAN (Dow Jones)--Bank of Italy Governor Mario Draghi wanted a new Italian national champion, and after Banca Intesa SpA (BIN.MI) and Sanpaolo IMI SpA (SPI.MI) agreed to a merger plan Saturday, his wish has come true.

The markets must have wanted another Italian bank ranking in Europe's top 10 too, since investors added almost EUR6 billion to Intesa and Sanpaolo's market value in the two trading days after the plan was announced.

It's an important accomplishment. The banks' management and Draghi have a right to their moment of congratulation.

Having said that, Italy's banking market needs more than just a "superbanca." What it really needs is more competition and the benefits competition brings - greater efficiency, lower prices, better service and, ultimately, economic growth.

Top executives at Italy's biggest banks would retort, feathers ruffled, "but the sector already is competitive."

Yes, since 10 years ago it wasn't unusual for an Italian bank to have a return on equity in the single digits.

Yes, the lines aren't as long, the staff no longer rude and the service is quicker. But fees are among the highest in Europe.

And we're talking about a banking system that 88% of Italians believe is responsible - according to a survey - for selling bonds issued by Cirio Finanziaria SpA, Parmalat Finanziaria SpA and the Republic of Argentina to little old ladies right up until the issuers defaulted, sticking clients with hundreds of millions of euros of losses.

No surprise then that one of the few dissenting voices among the happy chorus welcoming the new bank was a consumer group, Adusbef, which said "so far, economies of scale haven't had a positive effect on banking services available to clients."

So will the new, big, bank usher in an era of greater competition, lower prices and better practices? Will it be able to give Italy's industrial backbone of small- and medium-sized companies the expertise they need to compete in a globalized economy?

Or will it simply be a big version of a protected, less-than-efficient, overstaffed domestic Italian bank?

All eyes are on the bank's new management for signals that Italy's financial elite has embraced competition and left its "salotto buono" (untranslatable, but roughly "good drawing room") days behind it.

While the days when merchant bank Mediobanca SpA (MB.MI) decided the fate of Italy's family-held industrial companies in its austere offices behind Teatro alla Scala are over, Italy's business elite has struggled to find its footing in the brave new world of market-embracing competition.

If the "superbanca's" new management throws its weight solidly behind competition, we will know that the "salotto buono" is finally dead. If the new bank shows signs of power-broking, insider deals and disregard for its own clients, that means the "salotto buono" isn't a place or time, but is an entrenched mentality.

Working against it is the fact that the merger is defensive, since both banks were worried about being taken over by larger rivals.

Plus, the ties between levels of management at the two banks to politically connected non-profit foundations, as well as to Prime Minister Romano Prodi and to members of the Democratic Left, are another potential pitfall.

On the positive side, competitors are likely to be able to grab some market share since regulators may force the new bank to put up to 700 branches on the market (by some estimates). That's about the size of an Italian mid-sized bank like Banca Nazionale del Lavoro SpA (BNL.MI) which has about 800. So on paper at least it looks like more competition is on the way.

Corrado Passera, the executive tipped to lead the new bank, has a solid record as the manager who kicked Italy's ailing post office Poste Italiana into shape before he took on the mess that was Banca Intesa in 2003.

He manages to combine an ability to set and meet targets through efficient management with an ability to network with Italy's center-left politicians, as well as with the "Catholic finance" power center that puts ethics before the profit motive.

As long as he can keep up this balancing act, he may be the right man for the job. If would be encouraging a year from now to see a newly competitive Fiat SpA, two international banking heavyweights, a newly credible Bank of Italy and a liberalizing government in Rome as signals that Italian leaders are removing some of the obstacles which have been holding Italy back.

-By Jennifer Clark, Dow Jones; 39 02 58 21 9904; [email protected]

(END) Dow Jones Newswires

August 27, 2006 11:29 ET (15:29 GMT)

Copyright (c) 2006 Dow Jones & Company, Inc.