View from City Road: Banking supervision needs to be tightened

Looking on the bright side, the Spanish central bank spotted Banesto's new losses before they became terminal. But investors caught with the stock of a bank that has just lost two-thirds of its equity are owed an explanation.

Most Spanish banks and investors have long had nagging doubts about Banesto. As Keith Brown of the investment bank Morgan Stanley says, these doubts were only set aside in recent months because of the involvement of J P Morgan.

Not only was Banesto the first major investment of Morgan's Corsair fund, the blue chip New Yorkers also set about raising new capital for Banesto.

The extraordinary thing about J P Morgan is that it achieved, by associating Banesto with its reputation for quality, something not even the Spanish central bank could manage. Central bank supervisors failed to restore confidence when they mounted special audits.

Morgan is the market's scapegoat and, given the number of investors it persuaded to participate, that is only fair and may be reflected in its own share price. But in the end the buck should stop with the Spanish central bank.

Of course, after BCCI the City of London cannot feel smug about standards of supervision. But the failure of the Spanish to pick up the full scale of Banesto's losses earlier does matter for the rest of Europe, because we are now one year into the new single banking passport.

Any bank licensed by the Spanish central bank or another European Union supervisor has a right to set up in London. The supervisor of the parent bank takes responsibility for its health.

It is increasingly clear, and the Banesto case confirms this, that the biggest problem is not harmonising the rulebooks - the European Commission's obsession - but raising standards of supervision in a number of member states.