LONDON/BRUSSELS Spain's EU bank bailout has catalyzed growing German and French support for the European Central Bank to take over responsibility from the European Banking Authority for monitoring Europe's biggest lenders.
France is calling for a banking union to help draw a line under the euro zone sovereign debt crisis and try to break the link between fragile banks and indebted governments. Paris wants the ECB to be the critical overseer of the region's banking sector, a position Berlin increasingly supports.
The European Commission is also pushing for closer coordination among member countries on overhauling their banking systems and moving towards a banking union, including building on proposals for a unified deposit insurance scheme to protect savers worried about the security of their deposits.
That could lead to the demise of the European Banking Authority, which currently has oversight but whose abilities have been called into question by failed banking stress tests, particularly when it comes to Spain.
"I would have nothing against giving the ECB a tougher, stronger role here," German Chancellor Angela Merkel said on Thursday, developing on her ideas for enhanced responsibility for the Frankfurt-based bank over the London-based EBA.
It's still unclear whether a single supervisor would oversee only the biggest and most important lenders or all lenders, but experts said the ECB was the only organization that could provide money at the critical moment to troubled banks.
"You could say the prudential element of banks needs to be overseen by central banks as they are the lender of last resort," said Graham Bishop, a former investment banker and now adviser on regulation to the EU.
The ECB was first among global central banks to pump liquidity into a financial system that was drying up as the U.S. subprime crisis unfolded in the summer of 2007.
And the importance of a "lender of last resort" for banks in trouble was evident when the ECB lent banks a combined one trillion euros in December and early this year.
It now wants policymakers to take far reaching decisions to integrate control of the financial system.
The ECB has already begun flexing its supervisory muscles, such as wanting direct say over clearing houses that handle large amounts of euro-denominated assets, and its decision to bypass the market and build its own settlement system.
It also chairs the European Systemic Risk Board, a new body tasked with spotting asset bubbles and keep an eye on banks, though without direct powers of intervention.
Germany and others feel the ECB could cut through political hurdles put up by national regulators, which some say hobbled the EBA's stress test of banks.
Britain, the EU's biggest financial centre, has said it won't join a banking union but backs a single euro zone supervisor. It's concern, however, is that a single supervisor shouldn't be able to oversee non-euro denominated banking - that would be left up to national regulators in non-euro states.
"There is a Lisbon treaty provision that would allow the ECB to take this role," said a British diplomat.
ECB Vice President Vitor Constancio has confirmed this treaty provision. "It would not need anything else, just a vote (by governments)," he said this week.
The EBA was only launched 18 months ago and has few staff, up to a 100 compared with several thousand at the UK's Financial Services Authority alone. But almost since its creation, the EBA has fallen foul of critics.
Criticism has included the EBA's oversight of stress tests in Spain, when it produced a range of differing figures every day and ultimately failed to identify the problems in the market. Only months after most Spanish banks were given a clean bill of health, parts of its banking sector is close to collapse.
Last weekend the EU offered Spain up to 100 billion euros to stabilize its lenders, and Spain is expected to accept the bailout shortly.
One shortcoming of the EBA is that it is essentially guided by input from national supervisors, rather than having a central, executive power at its disposal, critics argue.
But its advocates note the ECB was a joint architect of the stress tests and that several EU states stopped the authority from a full frontal test of banks' sovereign debt exposures.
The EBA also showed some backbone in standing up to Germany and rejecting the inclusion of a type of hybrid debt in a bank's core capital, a step that sparked Germany's regulator Bafin to publicly lambast the authority.
Michel Barnier, the EU's financial services chief who played a key role in launching the EBA, said a legislative proposal for more integrated banking supervision may come in the autumn.
Barnier told Reuters that now was not the time to enter "institutional quarrels" and that the bloc's leaders should first focus on finding political agreement on having more integrated supervision.
Germany is thought to back the ECB playing the core supervisory role but does not want to rush into a banking union until there are safeguards to avoid its taxpayers having to sign a blank cheque to bail out ailing lenders in other countries.
Other EU officials said the EBA's powers need to be strengthened.
"When looking for a strong supervisor for banks, why do we need to reinvent the wheel. The EBA is there," one EU official said.
The EBA had no comment.
Financial experts say there could be a move afoot to replicate on a euro zone level the "twin peaks" supervisory approach countries like Britain are switching to.
This refers to the central bank looking at the prudential or risk-taking and capital side of banks, while a separate authority handles day-to-day supervision of conduct and compliance with rules.
The ECB could become one peak, the EBA the other.
"There is a twin peaks issue here. The idea that the ECB will take all supervision in-house is difficult to foresee. You still need supervisors on the ground," Bishop said.
(Additional reporting by Luke Baker in Brussels, Daniel Flynn in Paris and Marc Jones in Frankfurt, Editing by Luke Baker and Alexander Smith)