Sir Howard Davies: Europe’s banks need a federal fix

Sir Howard Davies

“Are we content to see banks from other, especially small European, countries take deposits across the continent on the same basis as before? Increasingly, supervisors and governments in larger states are answering No. But what are the consequences of denying banks that right?

“In principle, we can imagine two solutions to the problem. One is to require all banks that wish to take retail deposits in another member state to establish separately capitalised subsidiaries, which would be supervised by the host country. Those subsidiaries would also contribute towards the costs of the local deposit protection scheme. Many other countries operate that kind of regime for foreign banks.

“The problem is that it would be a fundamental retreat from the concept of a single market and would be a serious constraint on the most effective use of bank capital in Europe at a time when capital is scarcer than ever.

“There is a logical alternative. It is to create a single European supervisory authority, at least for banks that wish to operate on a pan-European basis. It would, in a sense, be modelled on the federal charter approach of the US.”

“The advantages of the federal approach are clear. We could sustain the single market, underpinned by institutions that match the integration of financial firms. The political difficulties are equally apparent. At least until the Irish roadblock is removed, it is hard to see a European consensus emerging in favour of endowing new central agencies with powers now exercised by member states.”

“The French understood the problem, if they could not resolve it. They asked Jacques de Larosière to chair a group of wise folk and report to the Czechs in the spring. If anyone can find an elegant solution it will be him. It is important that he does, as otherwise 2009 could be the year in which the single market begins to unravel, an outcome we would all live to regret.”

From “Europe’s banks need a federal fix”, in the Financial Times, 14 January 2009. Sir Howard Davies is director of the LSE and formerly Chairman of the Financial Services Authority. Read the full article at http://www.ft.com/cms/s/0/a5090d94-e18f-11dd-afa0-0000779fd2ac.html

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