The practice of allowing EU banks to take retail deposits across national lines is “dying out” because of repeated bank failures, including the recent problems in Cyprus, the UK’s top bank watchdog has predicted.

The EU’s single market rules have historically permitted banks to open deposit-taking branches anywhere in the 27-nation bloc without submitting to local regulation. Both supervision and deposit insurance are supposed to be the responsibility of the bank’s home country.

But this week, the UK government had to step in for the second time in five years to protect depositors who had put money into UK branches of first Icelandic and now Cypriot banks.

That situation is “not sustainable”, said Andrew Bailey, chief executive of the new Prudential Regulatory Authority, which oversaw the Tuesday transfer of £270m in deposits away from the UK branch of failed Cyprus bank Laiki. Without the intervention, UK depositors could have lost up to 60 per cent of deposits of more than €100,000 as part of the larger Cypriot bailout.
http://www.ft.com/cms/s/0/b6978fca-9c6d-11e2-ba3c-00144feabdc0.html