VIENNA, April 16 Austrian Finance Minister Maria Fekter backed Germany's call for changing European Union treaties to allow banking union, saying new institutions being set up needed proper legal underpinning.
Berlin said on Saturday the EU's Lisbon treaty had to be changed to allow common rules on shutting troubled banks - a central element of the union that aims to stabilise the euro zone and prevent taxpayers from footing bills for bank rescues.
"This is legitimate and we share this view," Austria's Fekter told reporters late on Monday for publication on Tuesday.
Banking union aims to shore up the euro zone by breaking the "doom loop" between ailing banks and state finances. As a first step, the European Central Bank is set to start supervising euro zone banks from July 2014.
This should be followed by a resolution scheme to close or salvage struggling banks. The third and final step would be a coherent framework across Europe for deposit protection.
Fekter said the "Chinese wall" between the ECB's new banking supervisory and monetary policy roles was not sufficiently strong.
She cited the example of Cyprus, questioning whether the ECB as supervisor could have pushed through bailout terms that entailed winding up one big bank and restructuring another.
"Then the ECB would not have been independent but rather a political body, and nobody wants this," she said.
Germany's Schaeuble has long had reservations about banking union, which would be a step towards allowing the euro zone's ESM rescue fund to assist banks directly, a move Germany fears might leave it footing the bill for reckless lending by foreign banks.
Fekter said all the elements of banking union - not just supervision - had to be in place before countries could tap ESM for funds to recapitalise struggling banks directly.
She said Austria was holding "good talks" with European Competition Commissioner Joaquin Almunia about restructuring nationalised bank Hypo Alpe Adria.
Almunia has warned the bank faces closure for failing to make a convincing case for restructuring.
Fekter said Hypo was in intensive talks to sell banking units, which was hard given current market conditions.
"You have to keep in mind that Hypo has continuously needed state aid ... and Commissioner Almunia has stressed that a bank that is operating on markets and is competing against other banks cannot be allowed to keep getting state aid," she said. (Editing by Jeremy Gaunt.)