* ECB bank supervision is first step towards banking union
* Officials to meet on Tuesday, seek way of appeasing
* Countries to consider ways to bolster national power
By John O'Donnell
BRUSSELS, Nov 19 European Union countries will
consider bending to German and British demands to soften the
power of the ECB in supervising banks to get agreement on
banking union, according to a document obtained by Reuters.
After three years of piecemeal crisis-fighting, European
countries are attempting to agree on a banking union to lay a
cornerstone of wider economic integration and protect the euro.
It is designed to unify the bloc's response to problem
lenders but the reform is deeply divisive and has prompted fears
across Europe, from Berlin to London, that the new construct
will give the ECB too much power at the expense of national
Now diplomats from Cyprus -- which holds the rotating EU
presidency and is seeking to broker a compromise -- have
suggested changes to break a logjam in talks and make the plan
more acceptable, in particular, to sceptical countries outside
the euro such as Sweden and Poland.
The proposal, dated November 16, recommends a structure that
will make it possible for countries outside the euro who join
the scheme to exempt themselves from decisions taken by the
European Central Bank, although that could result in their
expulsion from the banking union.
"The non-euro participating Member State may notify the ECB
that it will not be bound by that decision," officials write.
"The ECB shall then consider the possible suspension or
termination of the close cooperation."
"They are moving towards a way to accommodate non-eurozone
countries and also trying to give the national supervisory
authorities more power compared to the ECB," said one official,
familiar with the compromise, which will be discussed by
officials negotiating a banking union on Tuesday.
Diplomats will also consider a suggestion, backed by the
Netherlands and Luxembourg, to modify one of the most
significant powers the ECB would receive under the new regime.
Under this proposal, the ECB would also not be allowed use
its power to call for the closure of a stricken bank, until a
resolution system to wind down and pay for troubled lenders is
in place -- a distant prospect.
The document also suggests giving the ECB's bank supervisory
body, where countries are represented, stronger executive powers
as well as more autonomy to countries to decide when banks
should set aside more capital to cover losses.
Under the latest proposal for compromise, the ECB would,
however, retain the final say in supervising all banks in the
euro zone as well as other countries that choose to join.
"The latest versions reflects very much the complaints of
the member states, not by reducing the rights and powers of the
ECB, but making more explicit the rights and powers of the
member states," said a second official.
The diplomatic push comes amid growing concern in Brussels
that the construct is already crumbling in the face of powerful
opposition both within and outside the euro.
Germany, the leading economy in the euro zone, is pushing to
restrict the ECB's oversight to top banks while Britain, the
biggest country outside the euro, wants to stop the central bank
from taking decisions that infringe on its interests.
Making the ECB the supervisor for lenders chiefly in the 17
countries that use the euro would be the first of three pillars
in a banking union and one EU leaders have committed to complete
by the year-end.
When supervision is in place, it would pave the way for the
euro zone's rescue fund, the European Stability Mechanism, to
help troubled lenders directly rather than via governments.
Longer-term plans for a central scheme to wind down banks and
a combined means of deposit protection to prevent bank runs
would complete the banking union, underpinning lenders.
Britain has proposed a means for countries outside the
banking union to stop the ECB taking decisions that could affect
Germany, which wants to keep primary oversight of the
country's community savings banks, wants to limit the ECB's
remit to systemically important lenders.
It is also worried that the more banks are included in the
scheme, the higher the potential cost when, as is ultimately
planned, supervision is backed up by a central fund to pay for
the closure of troubled lenders.