October 17, 2012 / 8:21 PM / 7 years ago

UPDATE 1-EU seeks to involve non-euro states in banking union

* EU leaders to tackle banking union this week

* Countries consider options to include non-euro states (Adds detail from source)

By John O’Donnell

BRUSSELS, Oct 17 (Reuters) - European Union countries are considering creating a body inside the European Central Bank to find a legally watertight way to involve states outside the euro zone in a banking union, officials said on Wednesday.

European leaders meet on Thursday for a two-day summit where they will try to bridge divisions over a banking union that is intended to underpin the euro zone.

They will address one of the key obstacles to the project: how to cater for the 10 EU countries that do not use the euro and allay their fears that they could be side-lined or disadvantaged under the new structure.

Officials from the European Union’s 27 member states have already examined ways to give non-euro zone countries that join the scheme a say in supervisory decisions.

But this is legally complicated because the ECB must take all final decisions as both the central bank and chief banking supervisor under the proposed new framework.

The Financial Times reported on Wednesday a legal opinion prepared for finance ministers said the plan to create a single euro zone banking supervisor was illegal as EU law does not permit such changes in how the ECB works.

But officials disputed the newspaper’s interpretation.

“Clearly it’s not illegal,” said one official. “That’s wrong.”

One option to address this issue would be to create a new body within the central bank where regulators from non-euro-zone countries would have a say.

“The question of the ins and outs is a real challenge,” said the EU official, speaking on condition of anonymity.

“We have to find some kind of creative way to make sure that non-euro zone member states are given the right role,” said the official, adding that country leaders are expected to pledge to find a means to include non-euro zone states in the scheme in an “equitable” way.

A second EU official explained how such a body within the ECB would work.

“What you can do is create something in the ECB that does all of the preparatory work, but ultimately the decision has to be signed off by the ECB’s governing council,” said a second EU official. “The governing council would not overrule such a decision.”

The idea of creating a new body in the central bank has some supporters in the European Parliament.

“The best solution would be a new institution next to the ECB,” Sven Giegold, a German lawmaker who will play a key role in negotiating with EU member states over the final shape of supervision, told Reuters.

“Then we would be totally free from any treaty obligations concerning the ECB and we could have a governance structure which gives everybody who joins in full voting rights. Then Poland, Sweden and Romania might also join.”

The banking union is set to 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.

As well as building the foundations for better control of banks, the new supervision should also allow the new euro zone rescue fund, the European Stability Mechanism, to directly inject capital into struggling banks, such as those in Spain.

That would help break the interdependence between indebted nations and their weak banks that has fuelled the regional crisis.

Britain, home to Europe’s biggest financial centre, will stay out of the scheme. It is pushing for changes to dilute the power of the European Central Bank. (Reporting By John O’Donnell and Claire Davenport; Editing by Andrew Heavens)

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