The lion’s den of European banking regulation

Today the chancellor is going into the lion’s den to defend the bankers.

Europe feels that Britain failed to regulate the City ‘casino’ properly, and helped stoke the financial disaster that caused the recession across Europe.

The European Commission has come up with proposals that would give two continent-wide institutions the ultimate ability to regulate individual banks, including British ones.

The Treasury will push back against this strongly at today’s meeting of European finance ministers in Luxembourg. A veto is possible. The suspicion in the City is that France and Germany have been eagerly awaiting an opportunity to knock London off its perch.

(For a sense of this have a look at Jon’s interview with French Finance Minister Christine Lagarde during the G20. She likened the UK’s financial regulation to that of a reformed computer hacker.

Also the German finance minister Peer Steinbruck told me then that Britain, repeatedly vetoed his efforts at greater regulation during the boom [about two minutes in])

Surely there will be no greater opportunity for the likes of Madame Lagarde and Herr Steinbruck than now.

The UK position was outlined by City Minister Lord Myners this morning. If national taxpayers have to pay for bailouts then national supervisors should have the final say, says the Treasury.

Secondly, vesting early warning financial surveillance powers at the European Central Bank would be very difficult for the non-eurozone countries.

But it’s fair to say that British authorities have already indicated that a certain amount of regulatory sovereignty will have to be ceded to Europe and elsewhere given the multinational nature of our Banks.

The FSA Chairman Lord Turner has put it like this: “We have a decision. We either need more Europe or less”. Either foreign banks will have less access to the UK (think Iceland) and UK banks less abroad. Or we recognise that the sorts of gaps in banking regulation that saw AIG nearly bring down the entire financial system, can only be filled internationally.

Clearly the City would rather be regulated by Lord Turner than Jean-Claude Trichet. But the City has not covered itself in glory over the past decade. It also offers a delightful dilemma for the raft of populist Eurosceptic politicians elected on Sunday. Who’s worse: a City banker or a Brussels Eurocrat?