European Union grants ECB bank watchdog role

By John O'Donnell and Claire Davenport

BRUSSELS (Reuters) - EU lawmakers agreed on Tuesday to allow the ECB to police euro zone banks, but a levy imposed on Cypriot savers shows they will struggle to unify Europe's response to bank problems.

The deal between the European Parliament and member states finalises an accord agreed late last year to give the European Central Bank powers to supervise euro zone banks from mid-2014, a first step to a banking union across the 17-member bloc.

That agreement had initially been applauded as a step towards integration, but a surprise levy on Cypriot bank deposits has shaken hopes that Europe will unite in tackling bank problems rather than let countries struggle alone.

"This is a fundamental step towards a real banking union which must restore confidence in the euro zone's banks and ensure the solidity of the banking sector," said Michel Barnier, the European commissioner in charge of financial regulation.

Irish Finance Minister Michael Noonan, who played a central role in negotiations because Ireland holds the rotating EU presidency, welcomed the deal.

"The single supervisor is the core element of banking union and a vital step in breaking the vicious link between the banks and the sovereigns," he said in a statement.

The deal envisages that banks with assets of 30 billion euros, or larger than one-fifth of their country's economic output, are supervised by the ECB rather than national supervisors.

The next pillar of a banking union should be the creation of a central system and fund to close troubled banks, rather than leaving it to individual countries such as Cyprus or Ireland to have to manage alone.

But the reluctance of Germany and other economically strong countries to underpin such a fund means it will be hard to set up.

Paul De Grauwe, an economist with the London School of Economics, said that the levy imposed on Cypriot savers illustrated the lack of support for pooling national resources.

"This is almost a fatal blow to banking union," he said. "The one key element of banking union is a system to help each other out and share the cost when there is a banking crisis in one country. There is no willingness to do that."

(Additional reporting by Robin Emmott; editing by Ron Askew and Rex Merrifield)