Germany and the European Commission appeared at odds on Monday over the extent of oversight the European Central Bank should be given as part of efforts to create a European banking union and quell the region's debt crisis.
Olli Rehn, the European commissioner for economic and monetary affairs, said the ECB should be allowed to supervise all euro zone banks as well as those in non-euro zone countries that choose to become part of a single supervisory mechanism.
Such broad oversight would be the first step towards creating a banking union and allowing the euro zone to directly recapitalise banks to break the vicious circle between indebted governments and their troubled banking sectors.
But German Finance Minister Wolfgang Schaeuble has rejected such an approach, saying the ECB should instead focus on monitoring only the largest, systemically important banks, a move that would leave most German banks outside the net.
"Our approach … envisages an ambitious mechanism with a relatively broad coverage, which will oversee all banks in the euro area, with the ECB at the heart of the system," Rehn said in a speech to a European Parliament committee on Monday.
The European Commission will set out formal proposals for banking union on Sept. 12, when Commission President Jose Manuel Barroso makes his annual state of the union address. The drafting of the proposals has led to a battle of wills between national capitals and policymakers in Brussels.
If the ECB were to oversee all euro zone banks, it would give it responsibility for several thousand institutions, even if 95% of euro zone banking assets are held by only around 200 banks.
Schaeuble has said he believes a narrow field of responsibility will give the ECB more opportunity to focus its efforts and get to grips with breaking the banking-sovereign links, succeeding where previous authorities have failed.
"The ECB has itself said it does not have the potential to supervise the European Union's 6,000 banks in the foreseeable future," Schaeuble told German radio on Monday, saying a distinction should be drawn between small banks and major ones.
"With the bigger, systemically relevant banks … there is a chance that direct supervision by the ECB could be realised in a foreseeable period of time," he said.
Schaeuble has not made clear which institutions he would consider to be 'systemically relevant'. The 200 would include the larger German state-owned Landesbanks and Spanish 'cajas' where many of the European banking sector's problems began.
Berlin is keen to keep its state-owned Landesbanks, with their close relationships with politicians and businesses, out of the supervisory reaches of the ECB.
But Rehn stressed the sweeping powers for the ECB were needed because even relatively small banks could cause trouble.
"Even small banks can be systemic and cause financial turmoil," he said mentioning Britain's Northern Rock, Ireland's Anglo Irish and Spain's Bankia, which had to be nationalised to save them from failure.
After the Commission presents its banking union proposals, EU leaders will try to forge agreement before the end of the year on how to move forward. The aim is for the bones of a banking union to be in place early in 2013.
To complete the banking union, however, the euro zone will have to agree on a way to guarantee bank deposits in the single currency area and decide who will pay for the resolution of failed banks supervised by the ECB, a process that could take many months or years to complete.
