SNAP ANALYSIS: Fortis rescue tests patchwork EU regulation

BRUSSELS (Reuters) - A deepening wave of financial turmoil now spreading across the euro zone seems bound to fuel calls for a more centralized European regulatory framework, to which the ECB has said it is open.

A three-government bailout of Belgian-Dutch financial services group Fortis highlighted both the strengths and weaknesses of the European Union's existing patchwork system of financial regulation and banking supervision.

The European Commission said on Monday the rescue plan, in which -- uniquely -- European Central Bank President Jean-Claude Trichet and EU Competition Commissioner Neelie Kroes played a role, showed the current system can provide swift solutions.

"What we saw this weekend is that the system works ... both nationally and also trans-nationally," Commission spokesman Johannes Laitenberger said.

But the Fortis rescue involved three countries that are very close and already had a joint approach to overseeing cross-border groups - a congruence that not all multinationals benefit from.

Also, the need to bail out depositors to avoid a run on the bank in three countries was averted, thereby leaving the question of responsibility for the role of lender of last resort unanswered.

A SINGLE EUROPEAN REGULATOR?

The Commission and those member states with the biggest financial centers -- Britain, Germany and Luxembourg -- have long resisted any idea of a single European financial regulator.

But EU history shows such taboos can be broken in response to crisis.

The September 11, 2001 attacks on the United States led to the adoption of a European arrest warrant with the rapid and automatic handover of crime suspects among member states replacing an ancient, slow system of extradition proceedings.

France, which currently holds the EU's rotating presidency, has said it will put forward proposals on financial regulation at a summit of the 27-nation bloc on October 15-16 but has given little hint of the possible content.

President Nicolas Sarkozy has said Europe should take the lead in devising a new global regulation system after what he called the excesses of financial capitalism and has called for a summit based on the Group of Eight industrialized nations before the end of the year to discuss such measures.

WHO REGULATES NOW?

Under EU rules, it is up to the national regulator of a bank or financial institution in distress to handle the case. National regulators coordinate their action in a Paris-based Committee of European Securities Regulators (CESR), but this organization has no independent powers of action.

In the case of Fortis, a cross-border group traded on both the Brussels and Amsterdam stock exchanges, the Netherlands was the home regulator for its insurance business while Belgium was the home regulator for banking.

The European Commission is in charge of applying EU competition rules to large mergers with a cross-border dimension, and enforces rules regulating state aid to industry.