* ECB targets zombie banks on artificial life-support
* Some at ECB want EU antitrust chief Almunia as axeman
* ECB set to take on bank supervision from next year
By John O'Donnell and Paul Carrel
BRUSSELS/FRANKFURT, Nov 28 (Reuters) - The European Central Bank has proposed that the EU's powerful antitrust chief be given a permanent role for shutting down weak banks that survive largely on central bank funding, officials familiar with the issue say.
In the absence of a pan-European scheme for winding up struggling lenders, the task of cleaning up the sector has fallen by default to Joaquin Almunia, the European commissioner for competition issues, who ordered a restructuring of Spanish banks on Wednesday and wants similar moves in Greece.
Now, some officials at the ECB are examining how Almunia's job could be enhanced to give him a permanent and more powerful role in winding up banks. That could widen his remit beyond banks receiving state aid to those deemed too weak to survive.
Setting up an agency with the power to close down troubled banks that are being artificially kept alive by ECB loans is one part of a multi-step plan to establish a 'banking union' across the euro zone and the wider EU to restore confidence in an industry struggling after years of runaway lending.
Other elements include creating a single supervisor to oversee European banks, a job that is set to fall to the ECB, and the possible creation of a unified deposit guarantee scheme.
The problem of so-called zombie banks - which are propped up by support from governments and central banks but which have little prospect of lending to the economy again - is one of the first challenges the new watchdog will face.
It is also one of the chief concerns of ECB officials, who believe that the number of banks in the region needs to be shrunk in line with a rapid contraction in lending after years of cheap finance.
There are no reliable estimates on the number of endangered banks in Europe. Almunia has so far demanded the restructuring of about 50 banks since the beginning of the financial crisis and has ordered the closure of some including Germany's WestLB.
The clean-up is not something the ECB, as supervisor, can do itself, not least because it would bring it into conflict with governments which typically foot the bill for bank closures.
It needs an "executioner" to enforce such wind-ups and some at the central bank believe that could be the European Commission, the EU's powerful regulator and the only institution that already has the clout to shut down lenders.
"They have a financial stability mandate," said one person familiar with the ECB's thinking. "Under competition law, they have power. You can work on a plan where the Commission's Directorate General for Competition has resolution (powers)".
Such a move may first require a change to EU law to reinforce Almunia's position, the official said.
"You must be serious about how you do it - you cannot confer the responsibility on a shaky legal basis," said the person. The ECB declined to comment.
Formally handing the Spanish commissioner permanent and sweeping executive powers would offer a quick and convenient way of building another pillar of the banking union, itself an important step towards strengthening the euro zone's economic coordination.
Earlier this week, ECB Vice-President Vitor Constancio underscored the need to create a European resolution authority.
"Supervision is only one leg of a genuine financial union," he told an audience in Berlin.
"It also requires an effective tool to deal with bank failures without triggering financial instability, without long squabbles about burden-sharing, and without dragging sovereigns into a deadly embrace with their domestic banks."
It is a view shared widely by analysts who have observed the chaotic attempts by European countries to stem the impact of a banking crisis on their own lenders with little pan-European cooperation in tackling the problems.
Paul De Grauwe, an economist with the London School of Economics, blames national politics for the ongoing problems.
"Zombie banks are on an extended lifeline because of the lack of resolve to close them," he said.
"If you were to create an independent European institution, it would be easier to resolve that problem. But we are very far from that. Everybody wants to protect their own turf."
On Wednesday, Almunia announced that Spain would receive 37 billion euros of euro zone funds to recapitalise four banks, on condition of deep restructuring including closing hundreds of branches.
Typically, Almunia imposes changes in return for approving state assistance to laggard banks to prevent them from being put at an unfair advantage over rivals.
Some officials at the European Commission have reservations about the idea of putting him in charge of bank resolution, however, instead favouring the creation of a new authority, independent not only of the central bank but also of the Commission.
That agency could be staffed by officials now working for Almunia, said one.
"The Commission's state aid division has done a good job," said one EU official, speaking on condition of anonymity. "They ensure that state aid is not improperly used but resolution is not just about imposing principles."