Finance Minister Wolfgang Schaeuble told the German cabinet he was "optimistic" about a deal ahead of a meeting of EU finance ministers in Brussels on Wednesday, a German official said, speaking on condition of anonymity.
"We hope for major progress and perhaps a breakthrough (in the talks)," he said. "We have some questions but if they can be resolved by finance ministers today then Germany will not stand in the way of an agreement." After three years of piecemeal crisis-fighting measures, agreeing on a banking union would lay a cornerstone for deeper economic and fiscal reforms and mark the first concerted attempt to integrate the bloc's response to problem banks.
A single banking supervisor for the euro zone and most other EU states would be a crucial step towards that goal, although other issues such as a resolution authority for failed banks, a backstop fund and joint deposit insurance will remain. France and Germany had been at loggerheads over parts of the plan, but with little time left for the EU to meet a commitment to complete the framework for banking union by the end of the year, both countries redoubled efforts to settle their differences in late night negotiations on Tuesday.
Among the outstanding questions that ministers must settle are how many banks the ECB should directly supervise and whether the central bank gets longer than one year, as planned, to take on its role. Reaching a deal, which EU leaders hope to sign off at a summit on Thursday and Friday, will also require the backing of others with vested interests such as Britain, Sweden, Poland, Hungary and the Netherlands.
Berlin has dragged its feet for months due to concerns that it will be left to foot the bill for European banks too weak to survive when, as is planned at a later stage, a central resolution scheme is set up to close troubled banks. It remains worried about a potential conflict of interest between the ECB's roles as supervisor and as guardian of monetary policy. Such a conflict could arise if, for example, the ECB were to keep interest rates low to prop up banks.
In a sign of tensions last week, Schaeuble clashed publicly with French Finance Minister Pierre Moscovici at a meeting intended to finalise the plan. France wanted quick steps towards banking union; Germany said quality must come before speed. Among his firmest objections is Schaeuble's opposition to the ECB's Governing Council having the final say over monitoring banks, a position that pushed talks backwards. But there are signs he is ready to soften that stance.
France also has demands. "We can envisage degrees of supervision depending on banks' size, but on one condition - that in the end the European Central Bank holds the ultimate responsibility," Moscovici told Reuters this week. Britain remains concerned about the scheme. The EU Committee of Britain's upper house of parliament stressed in a report the need for London to obtain safeguards to ensure its large and influential banking sector was not put at a disadvantage. "I think the UK government has to wake up and go into battle for Britain and for the City of London," committee chairman Lyndon Harrison told Reuters. In particular, London wants to change the system of voting when regulators from across the European Union meet to flesh out EU law, such as defining in detail the type of capital reserves that qualify as a cushion against banks' risky assets.
The regulators meet under the umbrella of the European Banking Authority, but Britain is concerned that euro zone states - united under the supervision of the ECB - would vote as a bloc to force through rules that work in their favour. London has demanded that countries outside the single currency be able jointly to block certain decisions taken by the ECB, a veto that is opposed within the euro zone.