Brussels on collision course with Germany on banking union

The new regime would cover the roughly 6,000 banks falling under the single supervisory mechanism agreed earlier this year, which is being set up as part of the European Central Bank.

Just as controversial is the concept of a single bank resolution fund for the eurozone, which would pool funds collected at national level from levies on the banks.

The total size of the fund would eventually be around €55 billion, equivalent to 1 percent of total deposits held by banks, according to the EU executive. However, the fund would be built up gradually over a ten year period.

The German government has made clear that the power to take a bank into resolution should still lie in the hands of national authorities.

Meanwhile, they have also argued that a common resolution fund could become another de facto bailout mechanism and could not be created without treaty change.

Berlin lost no time in shooting down the commission's draft law.

"This proposal gives the European Commission a competence it cannot have based on the current treaties," a German government spokesman said Wednesday.

However, leading German MEP Sven Giegold, the Green group's economic affairs spokesman and co-rapporteur on banking union, accused his government of using "spurious legal arguments", adding that "Germany has not found any allies to support its legal position."

"This is irresponsible because effective banking resolution is a vital part of the banking union which is a vitally important tool to face the European crisis," he added.

For his part, EU financial services commissioner Michel Barnier, who presented the proposals, dismissed suggestions that the commission text had overstepped the mark.

"We have very carefully analysed the legal certainty in this text," he said.

Barnier said the proposal was based on article 114 of the EU treaty regarding harmonisation of national laws for the aim of creating a single market.

He said the establishment of this fund was necessary "because the banking sector and the euro and their stability are crucial to the edifice of the EU."

Barnier also rejected the idea of waiting for treaty change before pushing ahead with the completion of banking union. "We have immediate responsibilities…..we can't wait for such a change because we know what our problems are."

A paper released by the commission on Wednesday argued that neither the European Central Bank nor the European Banking Authority could legally be responsible for triggering a bank resolution procedure.

The resolution proposal comes just weeks after EU finance ministers agreed their position on the commission's draft bank resolution and recovery directive, a looser set of rules for all 28 member states.

Although EU leaders recently committed themselves to agreeing a position on Wednesday's proposal by the end of the year, German Federal elections in September is likely to slow the process down in the bloc's largest member state.

Ministers will then face a race against time to agree the regulation with MEPs before the European elections next May.