BRUSSELS European Union countries will examine a plan this week to allow the ECB to supervise banks in states outside the euro zone alongside those within the currency area, according to an EU document that lays down limits on the central bank's role.
Last week, EU leaders agreed to build a new system of supervision led by the European Central Bank, as a step towards a banking union where chiefly euro zone countries would jointly back problem lenders, in a move to underpin the currency.
But the plan has sparked concerns among the 10 countries in the wider European Union that do not use the euro that they will be indirectly affected by the ECB's new supervisory powers and put at a disadvantage, whether they join the scheme or not.
For the framework to become reality, diplomats must first find a way to accommodate countries outside the euro zone, such as Sweden or Denmark, who may want to join the scheme.
On Tuesday, EU officials circulated a document outlining one way to break the impasse, by establishing a supervisory board within the ECB, a body that would play a role in supervising lenders and where non-euro zone members would have a vote.
"This helps square the circle for non-euro countries," said one EU official. "It is an effort to find equal treatment."
In the draft legislation obtained by Reuters, officials make clear that the final say is with the ECB although it must explain itself if it rejects a decision by the supervisory body.
"The ECB will take all the key decisions," said a second EU official.
This may worry a country outside the euro zone such as Hungary, which wants equal representation if it is to sign up. Granting this is legally difficult, however, because the central bank answers only to the 17 members of the euro zone.
As a concession to those worried that the ECB's new remit will be too wide, the document fences off the central bank's powers from those of each country's agencies.
It says national supervisors should "carry out regular operational tasks" in monitoring banks, while the ECB focuses its efforts on systemic banks and those lenders which have been bailed out. Again, ultimate authority would rest with the ECB.
The banking union would have three major steps: the ECB takes over monitoring euro zone banks and others that sign up; a single fund is created to close down and settle the debts of failed banks; and a comprehensive scheme to protect savers' deposits is established.
The new supervision should pave the way for the new euro zone rescue fund, the European Stability Mechanism (ESM), to directly inject capital into struggling banks, such as those in Ireland.
Britain and all other members of the European Union must give the green light to the banking union before it can go ahead, an approval that could be delayed or withheld if their concerns are not addressed.
The close ties between some troubled governments and the banks they supervise, and on which they also rely to buy their debt, have 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 and protecting savers' deposits.
(Editing by Hugh Lawson)