France, Germany at odds over pace of EU bank reform
* Ministers discuss plan to give ECB powers to police banks
* Germany's Schaeuble raises concerns, says no quick deal
* France pushes for prompt action on blueprint
By John O'Donnell and Daniel Flynn
NICOSIA, Sept 15 (Reuters) - German reticence over how fast to centralise banking supervision in Europe stoked tensions with France on Saturday, which urged prompt implementation of a plan designed to tackle the financial crisis and help underpin the single currency.
The reform, which needs to be approved by the European Union's 27 member states, aims to break the link between struggling banks and indebted governments, an interdependence that has exacerbated the region's debt crisis.
By empowering the ECB to police all banks in the euro zone, the proposal from the European Commission hopes to break this vicious circle, laying the ground for deeper fiscal cooperation across Europe to underpin the euro currency.
On Saturday, EU finance ministers met in Cyprus to discuss the proposal but a split emerged after experts outlined at their earlier gathering on Friday how banking union could work.
Germany, which is keen to retain primary oversight for its regional savings and cooperative banks, had questioned whether the ECB should get the authority to supervise all 6,000 banks in the euro zone, arguing that it would overstretch the bank.
German Finance Minister Wolfgang Schaeuble reiterated this view on Friday, cautioning against expectations that a deal could be reached by the end of the year, a target set up euro zone leaders.
"My concern is always that you run the danger of creating expectations, also among financial market participants, that you then cannot fulfil," Schaeuble told journalists.
Officials in Berlin say it would be better to proceed more slowly with the reforms to ensure a water-tight system is put in place.
Investors are following developments closely, as handing powers of supervision to the ECB unlocks the possibility of direct aid to banks in Spain, for example, from the euro zone's permanent rescue scheme, the European Stability Mechanism.
"I don't see that there can be direct recapitalisation through the European Stability Mechanism already by January 1," said Schaeuble, adding that strict conditions would be applied to such assistance.
In contrast to Germany, France, where economic growth has ground to a halt since late last year and where banks have investments in struggling countries such as Greece, called for quick action.
When asked if he agreed with Schaeuble that establishing the supervision element of a banking union by the start of next year was unrealistic, French Finance Minister Pierre Moscovici answered: "No."
"We can, and we have to, go fast. We must not waste time in resolving the euro zone crisis," he said, adding that joint supervision should apply to all the region's banks. "The euro crisis is affecting everyone in the euro zone, including Germany. It is not a question of rushing but we must keep up the rhythm of reform."
Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the euro zone's 17 members that has frustrated investors and helped drive up borrowing costs for weaker states.
A banking union foresees three steps: the ECB getting the power to monitor all euro zone banks and others in the wider EU that agree to the oversight; the establishment of a fund to close troubled banks; and a fully fledged scheme to protect citizens' deposits across the euro zone.
Given that day-to-day supervision of banks would remain the task of national regulators, some officials suspect that Berlin's real concern is that a banking union would see it paying the costs of propping up lenders in weak countries.
Joerg Asmussen, a member of the ECB's Executive Board that forms the nucleus of its policymaking, warned that a banking union could not work without a fund paid for by industry to cover the cost of closing banks and a deposit protection scheme.
Experts from think tank Bruegel delivered a similar message to ministers on Friday.
The close ties between governments and the banks they supervised and on whom they also relied to buy their debt, has dragged both ever deeper into crisis.
A banking union would break this link by making the policing of banks supranational and establishing central schemes paid into collectively to cover the costs of closing failed lenders.
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