The supervision of cross-border financial institutions has long been organised on the basis of “he who pays the piper calls the tune”, as Charles Goodhart, the economist, puts it. In other words, since public money is at stake when bailing out insolvent banks, supervisory responsibilities are inextricably linked with fiscal policy. This has been the main rationale for supervisory powers remaining at national level, where taxation powers lie, even within the European single market.

The developments of the past decade, including the current crisis, have to some extent called into question the validity of this reasoning. First, financial integration, in particular within Europe, has made such progress that a bank's failure has repercussions not only for the taxpayers of the country where the bank is incorporated but also for those in other countries. This applies not only to banks with cross-border activities but also to those with mainly national operations that have a high exposure to the banks of other countries, in particular through the money market. Bank insolvencies can be highly contagious and spread throughout the single financial system.

Second, the European Union's push to harmonise financial regulation – via the Lamfalussy framework designed to ensure national watchdogs co-ordinate new regulations – has not achieved its objective, namely a level playing field. To give an example, the latest capital requirement directive includes more than 150 exemptions, allowing for discretion in how the directive is transposed into national legislation. Convergence between supervisory practices has also been insufficient.