ABN AMRO always assumed that it would be on the attacking end of a takeover bid, not on the receiving end of one. For that reason, Rijkman Groenink, its chief executive, had for years spearheaded a vigorous campaign to stop nationalistic European politicians from blocking cross-border mergers. This week he was caught in a trap that was partly of his own design. On April 23rd, days after the European Commission ordered Dutch regulators out of the way, ABN capitulated to a €66 billion ($90 billion) takeover bid from Britain's Barclays, in what could be the biggest banking merger ever. Then, two days later an even bigger potential offer blew in from a European consortium led by Royal Bank of Scotland (RBS), which aims to dismember ABN. This one verged on hostility, setting the stage for what could be the biggest and most bruising takeover battle in banking's history.

The contest involves numerous institutions, all betting astronomical amounts for a Dutch institution with offices in 53 countries that has never quite managed to piece its sprawling network together. Barclays offered €36.25 a share in an all-stock offer, which also included an agreement by ABN to sell its Chicago bank, LaSalle, to Bank of America for $21 billion. The RBS consortium, which includes Santander of Spain and Fortis, a Dutch-Belgian group, is offering €72 billion, of which €50 billion would be hard cash and the rest in RBS shares, valuing ABN at €39 a share. But it says its offer is dependent on the Dutch bank scrapping its proposal to sell LaSalle. Bank of America has given ABN a two-week window to shop for a higher offer. It will receive a $200m break-up fee if the deal falls through.

Activist hedge funds are also involved, bringing a hint of insecurity to the European banking landscape. They include the London-based Children's Investment Fund, which set the ball rolling by calling for a break-up or sale of ABN. Other hedge funds have since bought ABN shares, hoping that a hard-fought struggle to win the Dutch bank will increase the value of their investments.

Playing a big role, too, are regulators. The single-market commissioner in Brussels, Charlie McCreevy, has waded in to stop regulatory interference. In recent weeks, until Mr McCreevy slapped him down, there had been mixed messages from Nout Wellink, president of the Dutch central bank, some of them signalling how unhappy he would be to see ABN broken up. Even now, some worry about structural changes in a counterparty with big positions in complex derivatives—an estimated €10 trillion in notional principal in ABN's case. On top of this, a takeover might well move the bank's supervision to London. That is Barclays' intention and most likely RBS's as well. All of which must be galling to the Netherlands. Dutch authorities and Mr Groenink had battled since 2004 to stop regulators meddling in cross-border mergers, partly to facilitate the Dutch bank's incursion into Italy. They are not savouring the taste of their own medicine.

A takeover tussle of this scale and complexity would be sensational enough in any industry. But that it is taking place in a large, perfectly solvent financial conglomerate makes it doubly spectacular. It could shake up Europe's sclerotic and largely national banking structures, helping to break down the barriers blocking the much-dreamt-of single European market for financial services.

That is a long-running aspiration in Brussels, but so far progress has been haphazard. Often, takeovers have been triggered by the weakness of the target, rather than the potential strength of the marriage. So it was when UniCredit, an Italian bank, bought HVB, an ailing German bank, in 2005—the last big cross-border deal in Europe. Elsewhere, there has been a messy patchwork of transactions, such as BNP Paribas's takeover of Italy's Banca Nazionale del Lavoro and Crédit Agricole's buyout of Emporiki Bank in Greece.

Then there is that dream of every ambitious chief executive—world domination. Excluding HSBC, most European banks are no more than half the size of American war-horses such as Citigroup, Bank of America and JPMorgan Chase when measured by capital (see chart). A combination of Barclays and ABN would leap into the big league, and RBS would also be vastly more powerful with parts of the Dutch bank, such as LaSalle, in its pocket. Last week it emerged that UniCredit had also held unspecified talks with Société Générale of France. Such a partnership could exceed even that of Barclays and ABN in size; not to mention potentially stirring BNP Paribas, SocGen's French rival, into a bidding war.

Jean-Pierre Lambert, of Keefe, Bruyette & Woods in London, believes that there will be many more banking deals in Europe, possibly including hostile bids. New European Union banking legislation (due to be in place in about 18 months) requires that “bids should be assessed in a non-discriminatory way”. The legislation does not differentiate between hostile or friendly deals, nor between deals that break up banks or keep them intact. In this light, says Mr Lambert, the French regulator's opposition to hostile takeovers of banks (the “Trichet doctrine”) would not be allowable in a year and a half. “This means that banks face a simple choice: merge with a friend now, or risk seeing hostile bids in a year and a half,” says Mr Lambert. He believes that this is one reason why UniCredit and SocGen might now be in merger talks.

Dutch auctions

Furthermore, technology is becoming ever more important and allows banks to extract more cost savings, even across borders. This makes deals in foreign territory more attractive. Banks are keen to diversify away from slow-growing, saturated home markets. Mr Lambert argues that the market is finally waking up to the merits of consolidation after years of wariness over differences in culture, laws, tax systems and language.

Merger activity by consortia, rather than by single banks, could be the way of the future, even if RBS and its allies fail to secure ABN, and Barclays, or indeed a third bidding party, walks off with the spoils. A consortium including two private-equity firms last week bought Sallie Mae, a big American lender. Cerberus, a private investment firm, was among the buyers of BAWAG, a distressed Austrian bank. With the help of private equity even smaller banks, such as the Germans, may take part in pan-European consolidation.

Private-equity firms have hitherto been shy of buying financial institutions because banks are already highly leveraged and there is not much scope to add to their debt load (which is how private-equity businesses put their capital to work). However, they might start sniffing around parts of a bank, such as its asset-management or mortgage business. If hedge funds are beginning to shake up the banking industry, it is a fair bet that buy-out firms will not be too far behind.

All of which comes back to ABN. Whatever happens, it looks as though it will be carved up, to a greater or lesser degree depending on who wins: Barclays and Bank of America, or rival bidders. Mr Groenink, who has already agreed to surrender his leadership if the Barclays deal goes ahead, confessed this week that he was “a little sad” that ABN would lose its independence after 183 years.

Of course he is. But for the rest of Europe, there are reasons for raising a cheer or two about the way the saga has played out. Break-ups are at last on Europe's banking agenda; if they can create value in other industries, why not in financial services? The regulatory environment is finally tilting in favour of cross-border deals. The single currency and more coherent systems for cross-border payment, mortgages and other financial transactions make transnational bank mergers more appealing. If that makes Europe grow faster, so much the better.