EU banking union stokes sharp differences

(BRUSSELS) - EU leaders finally agreed Thursday on a calendar for setting up a banking union after a Franco-German spat held up agreement on exactly when this key crisis-fighting tool might come into force.

The 'banking union', which is to establish a single, Europe-wide regulator under the oversight of the European Central Bank, will work hand-in-hand with the new eurozone new debt rescue fund, the European Stability Mechanism (ESM).

When the supervisor is in place, the ESM would then be allowed to recapitalise weak member state banks directly, avoiding adding to a country's debt burden.

Most eurozone member states support the principle but the devil is in the details of how it will work. Here are the main areas of discord.

TERMS, TIMETABLE

The supervision led by European Central Bank is supposed to be the first stage of the banking union, followed by a common deposit guarantee system and another to wind up or reorganise failing banks before they can undermine the financial system.

France, Spain and Italy wanted the initial system -- known as the Single Supervisory Mechanism (SSM) -- cleared by end-2012 and to come into operation throughout 2013, hoping to benefit quickly from potential aid from the ESM.

In contrast, Germany wanted to go slower, with the new regulator taking on only the biggest banks at first so as to ensure the system works properly before it is expanded.

Sources said that the ECB would be tasked with supervising all 6,000 eurozone banks at the beginning of 2014.

Non-euro states such as Britain support measures to tame the eurozone debt crisis as in their own interest but fear that the SSM could sideline their regulators, especially for their many banks with eurozone operations.

The position is equally complicated for states such as Poland which plan to join the eurozone but as yet remain outside the bloc and accordingly have no representation at the ECB, or the Czechs who say their banks are almost entirely owned by eurozone lenders.

ECB, EUROPEAN BANKING AUTHORITY

In the fallout from the 2008 global financial crisis, Europe agreed to tighten regulation over the banks whose free-wheeling speculative practices were largely blamed for the disaster.

They therefore set up the European Banking Authority in London, home to one of the world's biggest financial markets, with all 27 EU members getting a vote.

Under the new system, only the 17 eurozone countries would have a vote at the ECB, and the eurozone bloc within the EBA can outvote the other 10 non-euro members. For Britain, this is simply unacceptable and other non-euro states such as Sweden are also totally opposed.