The 11 countries of the euro zone share a single currency, a single monetary policy, and a single financial market. But they don't have a single banking regulator. They should. It's easy to imagine problems at one bank quickly spreading to others across Europe while local authorities waste precious hours or even days in deliberating how to respond.
The danger will only grow as Europe's financial system coalesces. In the 18 months since the euro's launch, the region's capital and wholesale markets have become more integrated. Banks are snapping up subsidiaries in neighboring countries and even merging across borders. It's only a matter of time before the first pan-European bank emerges. "Banks are increasingly exposed to risks originating from [elsewhere in the euro zone]," European Central Bank President Wim Duisenberg told a conference on May 22. "Risks to financial stability are less and less confined to national borders."
Yet regulation is still a purely national matter. That means, for example, that the Dutch are responsible for supervising the entire ING Group, even though the Amsterdam-headquartered financial-services conglomerate also has major operations in Belgium, Germany, and Britain. When everything is going well, that system works. But as soon as problems surface, forget it. National regulators don't have people on the ground in other EU countries. And they can't rely on local authorities--who play a secondary role in supervising the operations of foreign banks within their borders--to pass on information quickly enough.
TURF WARS. To make matters worse, the 11 euro-zone countries don't even share a lender of last resort. The European Central Bank isn't allowed to risk taxpayers' money propping up troubled institutions. National central banks are responsible for bailouts. Period. That means that citizens in one country might have to pay the full cost of cleaning up a Europe-wide problem. Plus, central banks could have conflicting policies about such rescues.
Yet changing the system won't be easy. National authorities will fight to keep their power and their jobs. And politicians will back them, arguing that losing control over bank supervision will somehow erode national sovereignty.
Of course, regulators are supposed to exchange information, and organizations are in place to facilitate that. But bankers complain that this isn't enough to guarantee consistent decision-making. No surprise. The fact is that regulatory systems in the EU are anything but uniform. In some countries, such as Spain, the central bank is responsible for supervision; in others--Germany, for example--a separate institution plays that role. Enforcement varies too: Germany is considered the most strict.
NO-BRAINER. The spread of Internet banking will only highlight these discrepancies. Banks could even try regulatory arbitrage--locating where the system is most lax and then selling their products online everywhere else. Indeed, the CEOs of six banks, including Holland's ABN Amro Holdings and Spain's Banco Bilbao Vizcaya Argentaria, recently urged their respective Finance Ministers to devise a common strategy to supervise online banks.
Some EU leaders understand the problem. French Economy Minister Laurent Fabius says he will make overhauling the regulatory and supervisory system a priority when France takes over the EU's rotating presidency next month. At his prompting, the EU has just set up a committee to consider how to manage the single market in financial services. The head of the group, Alexandre Lamfalussy--former chief of the European Monetary Institute, the ECB's forerunner--knows what he's up against. "There is a genuine risk that the regulation of financial services in Europe will be unable to cope with the radical changes in the Continent's financial landscape," he says.
True. The odds are that Europeans will content themselves with the oh-so-familiar calls for closer cooperation and the swifter exchange of information. But the Continent needs a single regulator now--before there is an emergency.