There is another danger. In general the wheels of European policy turn slowly. Proposals on the central clearing of derivatives and bankers’ pay, among others, have been twice delayed in recent weeks and are now expected to emerge later this month. Revisions to rules that will force banks to hold more capital will not be released for months and certainly not agreed before next year. Yet by the time Europe has agreed on a set of common rules, many countries will have already revamped their own.

Britain’s Financial Services Authority, for instance, has already proposed measures to force subsidiaries of big banks operating in Britain to hold more capital. It also wants to use a loophole in European law that gives it the power to impose liquidity requirements on the local branches of banks from elsewhere in Europe. These are moves that appear to undermine the principle of Europe’s single market in banking.

Centrifugal forces

National governments have bailed out their banks in exchange for an explicit or unspoken promise to keep up lending to small businesses in their home markets (although some have supported continued lending in troubled eastern European and Baltic countries). The European Commission’s competition watchdog, which is policing the aid, also appears to be contributing to fragmentation, albeit unwittingly. Axel Weber, the president of the Bundesbank, Germany’s central bank, recently complained that it was forcing banks to focus their lending and borrowing in their home markets, a charge the commission has hotly denied. Those most keen to reform European finance may yet find their principal sin is tardiness. For even as they write new rules, the market they want to regulate is fragmenting before their eyes.

... contd.