BRUSSELS The EU is struggling to agree plans for the European Central Bank to police lenders from next year, according to a document seen by Reuters on Wednesday that flagged British demands for what many see as a veto over the scheme.
A report, written by EU officials to outline progress after weeks attempting to settle differences between countries, laid bare disagreements that could yet derail this reform designed to underpin lenders.
Any postponement of the new system, set to be phased in from January, could unnerve investors, as they expect establishment of the watchdog to pave the way for allowing the euro zone's rescue scheme, the European Stability Mechanism, aid banks, such as in Spain, directly rather than via the state.
Diplomats are trying to broker compromise with London, which wants to change voting rules for when regulators from across the 27-country European Union meet to flesh out EU law, on issues such as defining the type of capital banks can use.
Britain wants to see a double vote take place - one for those in the banking union and another for non-euro countries outside - before any final decision. Because Britain would dominate the group outside the scheme, many see this as a veto.
London is concerned countries in the euro zone - united under the supervision of the ECB - would force through rules that work in their favour.
Commenting on this issue, officials write in their report that countries "are still broadly divided". The blessing of all EU nations is needed for the scheme to go ahead.
After three years of piecemeal crisis-fighting measures, agreeing on a banking union would lay a cornerstone for wider economic union and mark the first concerted attempt to integrate the euro zone's haphazard response to financial turmoil.
But diplomats are also struggling to agree on a way for countries outside the euro that join the ECB-led system of supervision to be placed on equal footing with those that use the currency.
Cyprus, which holds the EU presidency that rotates between countries and is trying to bridge such gaps, has suggested allowing those non-euro states that join the scheme to ignore some ECB decisions.
The report even raises the possibility of a delay to full introduction of the project that is expected to see the European Central Bank take on a supervisory role during the course of next year. EU officials, however, played down any risk that the January start date would be postponed.
"Suggestions have been made by some delegations to seek a more flexible phasing-in arrangement, thus leaving the ECB more time to prepare for the taking over of its new supervisory tasks," officials write in the report.
The divisions will add to growing concerns in Brussels that the construct is already crumbling in the face of powerful opposition both within and outside the euro.
Germany, the leading economy in the euro zone, is pushing to restrict the ECB's oversight to top banks as Britain, the biggest country outside the euro, is fighting to stop the central bank from taking decisions infringing on its interests.
Some EU officials fear the tug-of-war between countries will end up with the creation of a "toothless" banking supervisor.
Germany, which wants to keep primary oversight of the country's community savings banks, wants to limit the ECB's remit to systemically important lenders. The ECB said the scheme should include all lenders.
Various proposals have also been examined to hand national supervisors back more power, trimming the ECB's role.
Making the ECB the supervisor for lenders chiefly in the 17 countries that use the euro would be the first of three pillars in a banking union.
Longer-term plans for schemes to wind down banks and ensure deposit protection would complete the union.
(Reporting By John O'Donnell; Editing by Ruth Pitchford and Jason Webb)