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European bank mergers and acquisitions are back! Or, well, a bit of chat about the possibility is anyway. It’s easy to be carried away: Top banking regulators are hungry for the efficiency, profitability and better service that pan-European banks could deliver.

Last week, Deutsche Bank AG Chief Executive Officer Christian Sewing told a Bloomberg conference that he wants to lead European consolidation, though he also listed the many hurdles to clear before deals can be done. BNP Paribas SA of France, meanwhile, has been dropping hints to the Dutch government that it might be willing to take ABN Amro off its hands, Bloomberg News revealed a few days earlier.

Big deals have been absent so long that authorities might cheer the limpest of pairings over the line. In eagerness see something happen, we’re in danger of forgetting to ask why, or whether such deals are even a good idea. Creating European champions would be good for the banks, for their ability to compete with US peers and potentially good for Europe’s economy overall. But they could make things worse for some countries or regions by exacerbating economic downturns.

The European Central Bank and its supervisory arms have been pushing for a Banking Union since 2014 — a true single market in finance. The biggest roadblock is the lack of a common European-level deposit insurance scheme. There had been hopes of a breakthrough, but a meeting of Eurogroup finance ministers this month quailed again, unable to agree to create something that Andrea Enria, head of banking supervision at the ECB, last week called “the holy grail.” The US has had a Federal deposit insurance program since the 1930s.

But the European project has gotten far enough to win some benefits from global rule setters at the Basel Committee on Banking Supervision. This month, they finalized new rules for banks lending across national borders within Europe, allowing such loans to be treated more like domestic ones. This is a big deal for almost no one except BNP, one of the few banks that has a pan-European business. The new rules mean BNP itself becomes less systemically risky and so capital requirements will be lower.

Cross-border lending is a big part of what European deals and a Banking Union are meant to promote. It collapsed after the 2008 global financial crisis and has struggled to recover. The ECB wants more cross-border loans because multinational banks should be less susceptible to domestic shocks; competition and resilience in the European banking sector could be enhanced; and big sophisticated banks would bring better risk management to smaller markets.

Retrenchment since 2008 left many European banks focused on lending at home and with big exposure to their own government’s bonds. Much of this happened because the doom-loop that linked the fates of banks and their governments during the euro zone crisis of 2011-2012 revealed the allergic reaction many countries have to the idea of sharing financial risks within the currency bloc. That brought about the fragmentation within Europe that the ECB is still struggling to solve today.

The reluctance to share risks is also why it is so hard to put together a single deposit insurance scheme. True banking union might never happen until there are federal European bonds, taxation and spending. It need not be to the same level as the US, but a good way there would help.

Indeed, if the holy grail has American characteristics, the quest must be pursued gingerly. It’s not without risks. Free movement of capital and credit across borders inside Europe would benefit the Union as a whole but potentially worsen economic outcomes in some regions. That’s the conclusion of a recent study of US banking by academics at UCLA and the University of Chicago, written up in the Anderson Review.

US financial deregulation in the 1980s allowed lending across state borders and helped banks better deal with shocks linked to changes in economic growth or productivity of big industries in different US states. When risks and returns worsened in their home states, banks were free to look for better borrowers elsewhere. This may have helped generate the Great Moderation of non-inflationary growth with few economic disasters that prevailed over in the US — and beyond — from the 1990s onward, the academics conclude. The catch was that tranquility at the aggregate level came at the cost of greater variance between the fortunes of different states.

“[A] stronger banking union could lead to a divergence of economic growth between member states,” the academics noted about Europe.

Cross-border banking deals and more risk sharing in Europe make a lot of sense for the region’s banks. But there will likely be political costs to a Banking Union, too.

More From This Writer and Others at Bloomberg Opinion:

Apple, JPMorgan Turn to Pay Now Grow Later: Paul J. Davies

Europe Is a Vast Idea. How Does Ukraine Fit In?: Andreas Kluth

The Euro Will Survive Falling Below Parity With the Dollar: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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