Tighter Control for Euro Banks 
Senior euro-zone finance officials, moving ahead on a plan to create a single overarching bank supervisor for all the countries in the 17-nation currency bloc, are settling on a framework that would create a new agency reporting to the European Central Bank to police the largest banks in the currency union, people involved in the discussions said.
() - Euro-zone leaders mandated the regional supervisor's creation at a summit here in June, a significant step toward creating a future banking union among the countries that use the currency.
The establishment of a single authority, with a single set of rules for the region's banks, is seen by Germany and other strong economies as an essential condition before they will consider sharing resources with other euro-zone countries.
Disclosing the first details of how the discussions on setting up the entity were progressing, officials involved said the talks were coalescing around the idea of creating an agency under the ECB that would be charged with sole supervision of the top 25 or so largest banks.
They said smaller euro-zone banks would remain under the purview of their national financial-market regulators. But these national regulators would be brought under the control of the euro-zone supervisor, which could be based in Brussels rather than Frankfurt, the ECB's home.
Although the summit statement said euro-zone finance ministers would flesh out their decisions at a meeting in Brussels Monday, officials from some of the 17 governments said they don't expect ministers to advance the proposals much there.
One of the few areas where they are expected to make significant progress is the details of as much as €100 billion ($122.8 billion) of aid Spain has requested to recapitalize its banks.
While the final sign-off is expected later in July, officials have said the list of conditions to be attached to the assistance is likely to be largely decided and a rough figure for the total agreed.
The meeting will also discuss a bailout request by Cyprus as well as Greece's bailout program, but aren't expected to make a decision. Ahead of the meeting, Russia's finance minister said Cyprus had requested a €5 billion rescue loan from Moscow.
Euro-zone leaders promoted the decision to create a new bank authority as a major breakthrough when they announced it on June 29.
At their summit, leaders made the establishment of the supervisor as a precondition for agreeing to allow the bloc's bailout fund to inject capital directly into struggling banks. That latter innovation was designed to help Spain, whose borrowing costs had been rising because of concerns that borrowing from the bailout funds to boost the capital of some struggling banks would further swell its fast-growing government-debt burden.
The new authority is expected to start operations with policing powers to ensure compliance with European banking rules and to ensure banks were carrying adequate capital cushions.
Only later, officials said, might the supervisor take responsibility for so-called bank resolution—decisions about whether banks should be recapitalized or wound up—and for a euro-zone deposit-guarantee fund. Concentrating these latter two powers on a single euro-zone authority is a tougher decision because they would also potentially create further heavy financial responsibilities for the euro-zone bailout funds.
German Chancellor Angela Merkel talks with European Central Bank President Mario Draghi and Italian Prime Minister Mario Monti prior to a second day of the summit in June.
Germany has supported the idea that the supervisor should be a part of the ECB, which it regards as a competent, effective institution. Berlin's support for the institution to be under ECB auspices seems likely to be decisive, despite the likely reservations from national bank authorities and from parts of the existing European Union bureaucracy in Brussels.
ECB officials have signaled they are willing to play a central role in supervising large euro-zone banks. In June, Vice President Vitor Constâncio publicly threw his support behind the proposal, saying the ECB had the expertise and infrastructure to perform the task.
But the idea doesn't have universal support within the ECB. Germany's central bank is worried that taking on banking supervision could come into conflict with the ECB's central task of keeping price increases under control. One fear is the ECB could be tempted to provide funds to save struggling banks, which could ignite inflation.
Last week, ECB President Mario Draghi laid out conditions he insisted were necessary to make the plan work and protect the ECB's "reputation." He said supervision and monetary policy must be "rigorously separated" to prevent "contamination" between the two tasks. He also said national supervisors should play a significant role in any new euro-zone supervision plan.
The idea that a separate agency should be created under ECB auspices, perhaps based in a different city, looks like a response to Mr. Draghi's concerns.
Officials in Berlin have been critical of the London-based European Banking Authority, which has overseen banking regulation in the 27-nation EU since January 2011. EU governments, not wanting to cede too many powers, limited the EBA's authority, leaving it relatively weak.
Its conduct of bank stress tests last year was widely criticized for failing to bolster confidence in the region's banks. In any case, euro-zone governments wouldn't tolerate an agency controlling their banks to be based outside the euro zone in the U.K.
Some European officials said the EBA will likely continue to exist, with the new ECB agency as its most powerful member.
Euro-zone leaders said they wanted agreement on the new supervisor by the end of 2012, but officials say the complexity of the task means it is likely the authority will take longer, perhaps into late 2013, to set it up. The framework now being settled is likely to act as the basis for a more-detailed plan to be worked out by the European Commission, the EU's executive agency, over the summer. One official said an interim supervisory authority could be set up to smooth the transition.
Allowing the fund to directly recapitalize banks was an effort to break the link between feeble banks and debt-burdened governments. But it is now unclear whether the shift would truly break this link.
A senior EU official with direct knowledge of the situation said on Friday that governments would still have to make good any losses the European Stability Mechanism, the bloc's permanent bailout fund to come into operation this year, suffered on capital injections in its banks.
"I need to make clear what the ESM can do: the ESM is able…to take an equity share in a bank. But only against full guarantee by the sovereign concerned," the official said. He added that while the member state's guarantee wouldn't directly show on the government's official debt burden, the investment "remains the risk of the sovereign."
The direct recapitalization was aimed at ending the situation where lending to governments to help their banks simply added to the government's debt load, pushing borrowing costs higher and further hurting the banks who often hold large amounts of their own government's debt.
—Brian Blackstone, Laurence Norman, and Gabriele Steinhauser contributed to this article.