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Reform of Europe's banks should be boosted by a pan-European banking system and more cross-border mergers within the European Union, Lorenzo Bini Smaghi, chairman of Société Générale, told CNBC.

Bini Smaghi, a member of the European Central Bank's governing board during the height of global financial crisis of June 2005-November 2011, told CNBC at the Ambrosetti Forum in Italy: "We need a European banking system."

Italian banks have been thrust into the spotlight this year over concerns about their solvency. Banca Monte dei Paschi di Siena (BMPS), the Italian bank which is the world's oldest, had secured a dramatic 5 billion euros ($5.6 billion) rescue package in July, after months of concerns about its portfolio of bad loans sent its share price plunging.

The Italian banking sector is stuck in a vicious, ever-decreasing circle with the economy. Banks can't lend to fuel the economy, the economy gets worse, and the chance of banks getting anything back from their bad debts shrinks even further.

Andrew Harrer | Bloomberg | Getty Images

BMPS still has to raise the capital to ensure its rescue, which may be even more difficult after the investigation by Italian prosecutors into its chief executive Fabrizio Viola and former chairman Alessandro Profumo for alleged market manipulation emerged last month.

Gianmaria Gros-Pietro, chairman of Intesa Sanpaolo, one of Italy's biggest lenders, told CNBC: "Each bank now has to be very rigorous on itself."

He added of the rescue: "We have not protected weaker banks, we have protected people."

Another complicating factor is the high proportion of ordinary people who have invested in Italian banks, which makes a bailout under EU terms, where investors lose out first, more complicated.

Bini Smaghi said Italy is unlikely to request a European Stability Mechanism program to help banks.

"You get this public money when there is no other money available. That is not the case in Italy," he said.

"The most important issue is to look not only at solvency, but at profitability. Can these banks attract private capital in the future?" he added.

He also added his voice to those of other European banking leaders calling on the Basel supervisory board, which is meeting twice this month, to clarify what will happen about global capital rules as it moves into the next post-credit crisis phase of reforms.