BRUSSELS (Reuters) - The European Parliament debates plans for a euro zone banking union on Wednesday, with members likely to raise concerns that the project designed to ease the currency bloc's crisis could sow divisions within the wider EU.
Earlier this month, Brussels proposed that the European Central Bank should supervise all euro zone banks as a first step towards creating the union, under which the 17 member nations would form a united front to back their lenders.
However, the plan has aroused worries in the 10 other European Union states, with their own currencies, that they will be indirectly affected.
They are free to join the scheme but many may not. Britain, home to Europe's biggest financial centre in London, will not participate but avoids openly criticising the project. Other governments have publicly expressed their reservations.
"The European Commission banking union proposal has the problem that it makes it very difficult for countries outside the euro," said Sven Giegold, a German member of the parliament.
"We have a big interest that countries outside have voting rights to stop a split between countries such as Poland and Germany," said Giegold, who will play a leading role in talks with European countries about the plan. "The same goes for Sweden."
Legally the European Parliament will have no say in writing much of the legislation to underpin a banking union. But it has powers to amend other important financial regulations and is likely to exert its influence in changing the new regime. Wednesday's debate starts at 08:00 British time.
Banking union, which aims to restore confidence in an industry that has been battered by crisis, has three major steps: the ECB takes over monitoring euro zone banks - and others that sign up - from national regulators; a fund is created to close down and settle the debts of failed banks; and a comprehensive scheme to protect savers' deposits is established.
Giegold underscored a central problem of the union - that it will drive a wedge between those countries inside the scheme and those outside, whose banks may suffer as a result.
Earlier this Swedish Finance Minister Anders Borg said he would not accept ECB oversight of Nordea, the Nordic region's biggest bank, as long as his country remained outside the banking union. Nordea has its headquarters outside the euro zone in Stockholm but has major operations in Finland, the sole Nordic country to use the common currency.
While Britain will stay outside the scheme, many international banks in London have operations in the euro zone that will be affected by the ECB's new supervisory reach.
London is worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city's position as Europe's financial capital.
Some believe that the European Banking Authority, set up to coordinate the supervision of banks in response to the financial crisis and which is run by regulators from across the European Union, could act as a counterbalance.
The European Commission has already suggested a special voting mechanism among EU regulators as a counterweight to the power of those in the euro zone.
The close ties between some troubled governments and the banks they supervise - and on which they also rely to buy their debt - have dragged both ever deeper into crisis.
A banking union would break this link by making the policing of banks supranational and establishing central schemes paid into collectively to cover the costs of closing failed lenders and protecting savers' deposits.
editing by David Stamp