German,Swedish leaders warn not to rush EU bank supervision plans

BERLIN Oct 16 (Reuters) - German Chancellor Angela Merkel and Swedish Prime Minister Fredrik Reinfeldt stressed on Tuesday that plans for a new pan-European banking watchdog should not be rushed through.

Under a European Commission proposal, joint supervision of the euro zone's banks is supposed to start in January 2013 as an attempt to break the link between struggling banks and indebted governments.

"Quality is more important than speed but that doesn't mean that we don't want to work quickly," Merkel said at a meeting with the Swedish leader in Berlin, adding that a more effective bank supervisor was ultimately needed.

She said banking supervision would be on the agenda at a two-day summit of European leaders beginning on Thursday.

Germany, which was a driving force behind the idea of a pan-European watchdog at an EU summit last June, has warned since then against overburdening the European Central Bank (ECB) with new tasks too soon and wants its powers of oversight to apply only to systemically-relevant or cross-border banks.

Reinfeldt said the proposals laid out by the European Commission were not yet fit for purpose.

"It is better to do it correctly rather than to force things through quickly," he said.

Reinfeldt said it was important that neither Sweden nor its taxpayers and banks ended up paying for losses made by other banks and added that no one had helped Sweden during its banking crisis in the 1990s.

His comments came just days after Sweden's Deputy Central Banker Per Jansson said current plans for the ECB to take over bank supervision in Europe and for creating a bank union were unacceptable.

Both Merkel and Reinfeldt said further steps towards integration would be discussed in Brussels and added that European and euro zone countries needed to stick together.

"We don't want to decide on any measures that would exclude individual countries right from the word go," Merkel said, adding that more fiscal, political and economic cooperation was, however, needed.

The speedy establishment of common banking supervision is necessary to pave the way for the direct recapitalization of lenders via the European Stability Mechanism (ESM), the euro zone's bailout fund. (Reporting by Andreas Rinke; Writing by Michelle Martin; editing by Ron Askew)