More federalism needed in the financial sector

Bank branch in Hamburg (picture Sebastian Wallroth)

An interesting article in the Financial Times today by Sir Howard Davies – read it here – points out the consequences of banking crashes in small countries. A bank in any member state of the EU (actually, the EEA, which is the EU plus Norway, Iceland and Liechtenstein) can take retail deposits in any other member state, but it is the compensation scheme in its home member state that takes the brunt of any crash.

The spread of cross-border retail banking has been substantial, thanks to the internet, and it is not always apparent where the liabilities finally end up. (This problem was discussed on the blog last year.)

It is clearly in the interests of consumers if this problem could be dealt with, but the solution will nevertheless not be easy. Sir Howard, in his article, observes that:

“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.”

From where I sit, political difficulties are there to be overcome, if that is what is in the public interest. Who would dare to say the opposite?

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