AMSTERDAM, Oct 9 (Reuters) - Policymakers should quickly empower the European Central Bank to supervise major lenders as a cornerstone of a strong banking union to underpin efforts to tackle the region's debt crisis, the Dutch central bank said.
Quick action was needed to cut the link between troubled banks and indebted national governments, the central bank said on Tuesday in a report on risks to the Dutch financial sector that highlighted differences between core euro zone states over how to solve the region's debt crisis.
"An effective banking union offers a way out from the negative interaction between banks and governments and halt capital flight," said the central bank.
European Union leaders agreed at the end of June to set up a single supervisory authority to oversee 6,000 banks in Europe, with the aim of having it in place by the end of the year, although that deadline looks ambitious.
But misgivings raised since then, notably in Berlin, mean the deal is in danger of unravelling or at best being significantly delayed.
Early last month, Germany said it was unrealistic for the ECB to oversee more than the bloc's biggest institutions.
Last week, the country's markets regulator Bafin said a deadline to establish a euro zone bank regulator by January 1, 2013 would likely be delayed by a year.
The Dutch Central Bank also said the ESM, the permanent rescue fund that came into force on Monday, needed to be granted the option of directly recapitalising troubled banks if shareholders or national governments could not.
Europe also needed a credible banking regulator in place, it said.
Dutch banks were not expected to have much room to pay dividends in the next few years due to increased capital demands, higher bad loans provisions, and higher funding costs.
Dutch finance officials have also indicated that even though they favour the creation of a single supervisor, it should only be allowed to directly recapitalise euro zone banks once it has been shown to be "effective".
They have suggested that the IMF could be used to test the effectiveness of the supervisory authority and ensure that it is ready to directly recapitalise, an audit process that could take time.
(Reporting by Gilbert Kreijger; Editing by John Stonestreet)
Keywords: EUROZONE BANKING/DUTCH