AMSTERDAM, Oct 9 (Reuters) - Policymakers should quicklyempower the European Central Bank to supervise major lenders asa cornerstone of a strong banking union to underpin efforts totackle the region's debt crisis,the Dutch central bank said.
Quick action was needed to cut the link between troubledbanks and indebted national governments, the central bank saidon Tuesday in a report on risks to the Dutch financial sectorthat highlighted differences between core euro zone states overhow to solve the region's debt crisis.
"An effective banking union offers a way out from thenegative interaction between banks and governments and haltcapital flight," said the central bank.
European Union leaders agreed at the end of June to set up asingle 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, meanthe deal is in danger of unravelling or at best beingsignificantly delayed.
Early last month, Germany said it was unrealistic for theECB to oversee more than the bloc's biggest institutions.
Last week, the country's markets regulator Bafin said adeadline 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 permanentrescue fund that came into force on Monday, needed to be grantedthe option of directly recapitalising troubled banks ifshareholders or national governments could not.
Europe also needed a credible banking regulator in place, itsaid.
Dutch banks were not expected to have much room to paydividends in the next few years due to increased capitaldemands, higher bad loans provisions, and higher funding costs.
Dutch finance officials have also indicated that even thoughthey favour the creation of a single supervisor, it should onlybe allowed to directly recapitalise euro zone banks once it hasbeen shown to be "effective".
They have suggested that the IMF could be used to test theeffectiveness of the supervisory authority and ensure that it isready to directly recapitalise, an audit process that could taketime.
(Reporting by Gilbert Kreijger; Editing by John Stonestreet)
Keywords: EUROZONE BANKING/DUTCH