EU officials fear divisions in case of banking crisis

(NICE) - The fight for survival at several big US banks is focusing minds in Europe on whether governments are prepared to react in case a major European bank also runs into deep trouble.

Although national governments have their own plans if local bank hits the rocks, Europe still lacks a prepared response in case of problems at a big pan-European bank.

"Let's imagine the failure of a cross-border bank. Are cooperation arrangements between ministries of finance, central banks and supervisors fit-for-purpose?" asked EU Internal Market Commissioner Charlie McCreevy at a financial sector conference on the French Riviera.

European financial regulators have failed to keep up with the waves of cross-border consolidation in the banking industry sector in recent years, leaving banks largely supervised along national lines.

That leaves big European banks like Deutsche Bank, Unicredit or BNParibas facing a hodge-podge of regulations across Europe, which officials fear could be a burden if ever there were serious trouble.

"All member states operate some form of early intervention mechanism in order to handle a crisis in an ailing bank. But the nature of the measures differ across member states," McCreevy said.

"While speedy action may be critically important to the survival of the institution or to minimise costs, such differences have the potential to complicate or impair efficient cross-border crisis handling," he warned.

Cross-border banking supervision has taken on increasing urgency since the outbreak of the US-born financial crisis a year ago, which recently forced the US government to bailout mortgage giants Freddie Mac and Fannie Mae.

In Europe, a similar bailout of a big institution with cross-border activities would be made all the more difficult because governments would want to limit contributions of taxpayers' money, especially if the bank were based in another country.

Fears for financial sector stability have grown over the last week as Wall Street titan Lehman Brothers and US bank Washington Mutual fight for survival.

Bank of France governor Christian Noyer told the conference that European banks were solid enough to weather a stronger storm, but warned: "Further shocks can't be excluded if you look at the weakened economic environment."

Edmond Alphandery, a senior French businessman who has served on the boards of many big companies, stressed that when the going gets tough Europe would be better off with a pan-European approach to ensuring financial sector stability.

"When there is a systemic risk, we should have a centralised regulator at the EU level," he said, arguing that the European Central Bank was best suited to deal with such crises.

However, governments are reluctant to cede powers to either the ECB or a pan-European authority, especially when it concerns something as essential as maintaining the stability of the financial sector.

As a result, the European Union is moving towards a system based on a so-called college of EU supervisors that would oversee the financial system, especially in the case of a crisis.

But the idea does not have universal backing.

"It's much better for you if you have a (centralised) EU system than a collegiate system," said Pervenche Beres, a French Socialist who chairs the European Parliament's economic and monetary affairs committee.