Separate banking rules for the euro area and non-euro countries,proposed as part of the European Union's efforts to keep the U.K.in the bloc, were greeted with skepticism by lawmakers from Berlinto Brussels on concerns that they could damage the singlemarket.

A draft EU-U.K. settlement published on Feb. 2 foresees thepossibility of “different sets of union rules” on prudentialrequirements for banks and other measures to bolster financialstability for the bloc's nine non-euro states, including the U.K.,and the euro area. This bifurcation may be necessitated by the needfor “more uniform” rules for the currency bloc, according to thedraft.

“A two-track approach to banking regulation would damage theEuropean Union,” said Lothar Binding, the Social DemocraticParty's lead lawmaker for finance in Germany's lower house ofparliament. “It undermines the attempt to reach a level playingfield within Europe. This approach would create chaos in thefinancial system in Europe, which the EU aims to avoid. It reflectsa tendency toward renationalization.”

Since the financial crisis, the EU has been working tostandardize bank rules across member countries, an effort overseenby the London-based European Banking Authority (EBA). That has beencomplicated by the creation of a banking union in the euro areafocused on the European Central Bank, which supervises the currencybloc's lenders, and the Single Resolution Board, which handlesfailures.

The draft settlement, which EU leaders will discuss at a summitlater this month, is intended to help keep the U.K. in the28-nation bloc by satisfying Prime Minister David Cameron's demandsfor greater sovereignty.

Andrea Enria, head of the EBA, said on Friday that “common rulesand convergence in supervisory practices are essential to preservethe integrity” of the single market. If divergence were allowed, itwould have to be managed carefully, he said.

“If a multilayered single rulebook is to be introduced toachieve this in practice, then it has to be managed in anintegrated fashion to avoid that regulatory differences generatebarriers and uneven competitive conditions in the cross-borderbusiness between 'ins' and 'outs,”' he said.

'Ambiguous' Proposal for Different BankingRules

Andrew Bailey, chief executive officer of the U.K. PrudentialRegulation Authority, said any divergence among banking ruleswould be minimal because most rules begin with a single globalsource, the Basel Committee on Banking Supervision, and are thenapplied at national level.

“This is very much at the edges of the rule book,” he said at anEBA conference on Friday. “It would be quite wrong to think this isthe heart and soul and a large part of the rule book, which iscommon” because of its origins at Basel and implementation at EUlevel.

The draft agreement is “ambiguous,” and much will depend on thewording of the final agreement reached by EU leaders, and how thosewords are applied in practice, said Frederic Oudea, chief executiveofficer of Societe Generale SA.

“The question is, will you have at the end of the day a singlemarket or not?” Oudea said on Friday. “It needs to be furtherlooked at. If it's not the single market then it will be an issue,but let's wait, it's too early.”

For Sylvie Goulard, a French lawmaker in the EuropeanParliament, the “key issue” is already clear: “Do we fight tosafeguard the single market, or don't we?”

Allowing different sets of banking rules “destroys what the EBAhas been doing and everything since we have created” EU-levelregulators, Goulard said. “If you take seriously the wishesexpressed by the U.K.—to make Europe more effective, lessfragmented, more competitive—I don't see why we should go in thisdirection.”

–With assistance from John Glover and Silla Brush.

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