30 May 2012 Last updated at 11:42 ET

Article written by Robert Peston Business editor

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Why a eurozone banking union is messy for Britain

 

What impact would a European banking union have on London's financial centre?

This is probably one of those "What did you think of the play, Mrs Lincoln?" notes.

But there are serious ramifications for the UK of the European Commission's confirmation that it believes a full European banking union is a necessary for monetary union to work in the long term.

This banking union would involve centralised supervision of euro area banks and a eurozone-wide deposit protection scheme - which in effect would involve some sharing by euro members of the costs of insuring retail deposits against loss.

Here is the blindingly obvious thing: the UK is not a member of the eurozone.

So, on the European Commission's model, the UK would no longer have a significant voice over decisions affecting the European banking industry. They would be taken by eurozone ministers and regulators, meeting separately from the rest of the European Union.

What is unclear is whether this would mean that powers to regulate and supervise the UK's banks would be repatriated to this country, or whether our banks, regulators and government would be bossed around by eurozone governments acting as a homogeneous unit. Both outcomes are possible.

None of this is trivial - not least because George Osborne's banking policies, which include putting a ring-fence around retail banks and giving the Bank of England's Financial Policy Committee the power to vary banks' capital ratios, are out of step with what most of the eurozone wants and plans.

I say none of that is trivial, in an absolute sense. But perhaps in a relative sense British qualms should be seen as nugatory - in that if banking union helps to keep the eurozone from imploding, maybe a bit of single-market messiness is a price worth paying.