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Cyprus Shows Urgent Need for Banking Union: S&P

CNBC

The raid on Cypriot bank deposits in return for aid could be repeated in other European countries and emphasizes the need for a region-wide banking union, Standard & Poor's (S&P) warned on Wednesday.

"The Cyprus case highlights the need for an effective banking union to give greater certainty over treatment of creditors of a failing bank," the ratings agency said in a report.

"Although the key features of the Cypriot banking system are not shared by other euro zone countries, we consider that the bail-in may indeed create a precedent."

(Read More: Cyprus Ignored Bailout and Bank Warnings: EU's Rehn)

Cyprus – the fourth euro zone country to request an international bailout –imposed a levy on bank deposits over 100,000 euros in exchange for a 10 billion euro aid package.

Earlier this month, the country's central bank defended the move, stressing that the majority of depositors who lost money were foreign, with 96 percent of deposits unaffected.

S&P said a single supervisory mechanism and a single resolution mechanism for European banks would be the "minimum requirements" needed to reduce the interdependence of banks and the state – a key feature of the euro zone's financial crisis.

The agency also said that some potential elements of a banking union, for example taxpayers in rich countries bailing out banks in another country, were unpopular and could limit the end result.

(Read More: Cyprus's Parliament Rejects a Tax on Bank Deposits)

"The electoral obstacles associated with such support are considerable and, in our view, governments may find them insurmountable. This raises doubts for us over the strength of the banking union that will ultimately be introduced," S&P said.

The possibility of a Europe-wide banking union has divided the region, with the finance ministers of France, Spain and Portugal pushing for elements of it to be implemented in the coming months, in the face of staunch opposition from Germany.

The European Central Bank on Tuesday said a full banking union should be in place by the middle of 2014.

- By CNBC's Katrina Bishop, follow her on Twitter @KatrinaBishop

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