At this point, a member of that tiny band of anoraks who fully understand the complexities of the single market – one of the Schleswig-Holstein questions of our time – may pipe up and say the problem lies in the European Economic Area, not the eurozone or the EU. For once she would be right, as it is the difficulties of the Icelandic banks that have revealed the fly in the ointment. In the EEA, a bank authorised in one country is authorised in all of them. Landsbanki was not supervised by the Financial Services Authority, yet could take deposits from UK retail customers. When Iceland began to melt down, so to speak, it became clear that the backing of the Icelandic central bank was insubstantial. The Icelandic banks had been allowed to grow too big for their authorities to save.
So a problem seen as a theoretical possibility has crystallised in an uncomfortable way. Icelanders are suffering most, but the case raises awkward issues. Are we content to see banks from other, especially small European, countries take deposits across the continent on the same basis as before? Increasingly, supervisors and governments in larger states are answering No. But what are the consequences of denying banks that right?
In principle, we can imagine two solutions to the problem. One is to require all banks that wish to take retail deposits in another member state to establish separately capitalised subsidiaries, which would be supervised by the host country. Those subsidiaries would also contribute towards the costs of the local deposit protection scheme. Many other countries operate that kind of regime for foreign banks.