At the beginning of the financial crisis, it was said that banks were, inCharles Goodhart’s crisp phrase, “international in life, but national indeath.” At the time (2008-2009), large international banks had to be rescued bytheir home countries’ governments when they raninto trouble. But the problem now in Europeis the opposite: banks are “national in life, but European in death.”

In Spain,for example, local savings banks (cajas) financed an outsize real-estate boom. As the boom turned to bust, the losses threatened to overwhelm thecapacity of the Spanish state, and the problem became European, because itthreatened the very survival of the euro.

The Spanish case is symptomatic of alarger problem. National supervisors always tend to minimize problems at home.Their instinct (and their bureaucraticinterest) is to defend their countries’ “nationalchampion” bank(s) abroad.

But their resistance to recognizing problems at home runs even deeper.Until recently, the Spanish authorities maintained that the problems in theircountry’s real-estate sector were temporary. To acknowledge the truth wouldhave meant admitting that for years they had overlooked the build-up of anunsustainable construction boom that now threatens to bankrupt the entirecountry.

In the case of Ireland,the situation was initially not much different. When problems started tosurface, the finance minister at the time initially claimed that the countrywould carry out “the cheapest bank rescue ever.”

Given national supervisors’ predictable tendency not to recognize problemsat home, it seemed natural that the cost of cleaningup insolvent banks should also beborne at the national level. It thus seemed to make sense that even in theeurozone, banking supervision remained largely national. The recently created European Banking Authority has only limited powersover national supervisors, whose daily work is guided mainly by nationalconsiderations.

But reality has shown that this approach is not tenable.Problems might originate at the national level, but, owing to monetary union,they quickly threaten the stability of the entire eurozone banking system.

At their June summit, Europe’s leadersfinally recognized the need to rectify thissituation, transferring responsibility for banking supervision in the eurozoneto the European Central Bank. Given that financial integration is particularlystrong within the monetary union, putting the ECB incharge was an obvious choice.

Moreover, the ECB already bears de facto responsibility for thestability of the eurozone’s banking system. But, until now, it had to lendmassive amounts to banks without being able to judge their soundness, becauseall of that information was in the hands of national authorities who guarded it jealously and typically denied problemsuntil it was too late.

Putting the ECB in charge should also help to stop the creeping disintegrationprocess, which is not publicly visible, but is very real nonetheless. Just askany of the large international banking groups headquartered in financiallystressed eurozone countries.

Consider the case of a bank headquartered in Italy,but with an important subsidiary in Germany.The German operations naturally generate a surplus of funds (given that savingsin Germanyfar exceed investment on average). The parent bank would like to use thesefunds to reinforce the group’s liquidity. But the German supervisoryauthorities consider Italyat risk and thus oppose any transfer of funds there.

The supervisor of the home country (Italy)has the opposite interest. It would like to see the “internal capital market”operate as much as possible. Here, too, it makes sense to have the ECB incharge as a neutral arbiter with respect tothese opposing interests.

But, while putting the ECB in charge of banking supervision solves oneproblem, it creates another: can national authorities still be held responsiblefor saving banks that they no longer supervise?

Economic (and political) logic requires that the eurozone will soon alsoneed a common bank rescue fund. Officially, this has not yet been acknowledged.But that is often the way that European integration proceeds: an incompletestep in one area later requires further steps in related areas.

This incremental approach has worked well in the past; indeed, today’sEuropean Union resulted from it. But a financial crisis does not givepolicymakers the time that they once had to explain to voters why one steprequired another. They will have to walk much more quickly to save the euro.