Eurozone weighs union on bank regulation Arguments that divided the European Union over its fiscal discipline treaty are beginning to be replayed over financial policy, as the eurozone explores forging ahead with its own regime for bank regulation. A senior European Central Bank policymaker last week in effect sketched out a framework for a eurozone banking union - an idea gaining traction in European policy circles and causing anxiety in London, which remains the main financial centre for the euro. Jörg Asmussen, an ECB executive board member, argued that the 17-nation currency bloc should be ready - if there is no deeper integration across the EU - to establish its own system to monitor financial institutions, including a special fund to handle collapses. Some economists believe that such a step is key to solving the eurozone crisis. "To break the kind of vicious circle between sovereign debt and bank problems that we saw in 2011, many people are thinking there also needs to be some element of a banking union, with common supervision, deposit insurance and resolution regimes," said André Sapir, a senior fellow at the Bruegel think-tank and member of the European Systemic Risk Board (ESRB), the body set up to monitor risks to the continent's financial system. Some elements of a euro area fiscal union are already there - it is messy and it has lots of problems, but that step is going forward. But this does not resolve the issues for financial stability," Mr Sapir said. The open discussion of a union on financial regulation sharpens a longstanding worry for British ministers: what will happen to the multi-currency EU "single market" when it includes a far more integrated eurozone? When he vetoed the EU fiscal treaty change last December, this danger was the central concern of David Cameron, UK prime minister. His demands for backing a treaty - firmly rejected by other leaders - were intended as legal safeguards to prevent the eurozone from rigging rules to harm the City of London. Yet Mr Cameron also recognises that deeper integration is a pre-requisite to a stable and prosperous eurozone, leaving British policymakers struggling to find the right response to the emergence of a two-speed Europe on financial regulation. "It is a deep and profound choice that the UK will have to make," said one senior European diplomat. But there is no real alternative to deeper integration. I don't think the City has any future as an offshore financial centre. You don't negotiate the conditions of your departure from the single market. Some European officials think Mr Asmussen's intervention was intended to chivvy all 27 EU member states into supporting principles behind the European Commission's long-delayed plans to handle bank collapses. After all, the ECB realises the benefits of a pan-European solution that includes the City, Europe's biggest financial centre. The Commission, too, is naturally pressing to avoid the fragmentation of the single market for the 27. "Any separation would be utterly foolish," said one EU official. From the economic view you don't have any advantages. From the institutional point of view it would be a mess. What do you gain? Yet while Britain vocally backs elements of EU regulation proposals - such as the notion of a "bail-in," where bondholders are forced to take losses when a bank fails or the state steps in - there are always political limits. Contributing billions to EU bank bailout funds or giving up power to pan-European financial supervisors are largely no-go areas for Westminster, giving ammunition to those who argue the eurozone should press on alone. One flashpoint is likely to be the review of the pan-European supervisory authorities - such as the European Banking Authority and ESRB - which begins next year. One option is giving the authorities differentiated responsibility, with more intrusive powers over the eurozone and a co-ordinating role for those outside the currency club. But that raises the question of whether the EBA can remain in London when it is the lead supervisor for the eurozone - a move Mr Cameron foresaw and put on his City wish-list last December. "The whole issue of "what more does the eurozone need to preserve stability?" will be central to the review," said one bank executive watching the regulatory developments. It will be tough for the UK.