Germany and the European Commission appeared at odds yesterday over the extent of oversight the European Central Bank should be given as part of efforts to create a European banking union and quell the region's debt crisis.

Our approach ... envisages an ambitious mechanism with a relatively broad coverage

Olli Rehn, the European commissioner for economic and monetary affairs, said the ECB should be allowed to supervise all eurozone banks as well as those in non-eurozone countries that choose to become part of a single supervisory mechanism.

Such broad oversight would be the first step towards creating a banking union and allowing the eurozone to directly recapitalise banks to break the vicious circle between indebted governments and their troubled banking sectors.

But German Finance Minister Wolfgang Schaeuble has rejected such an approach, saying the ECB should instead focus on monitoring only the largest, systemically important banks, a move that would leave most German banks outside the net.

“Our approach ... envisages an ambitious mechanism with a relatively broad coverage, which will oversee all banks in the euro area, with the ECB at the heart of the system,” Rehn said in a speech to a European Parliament committee yesterday.

The European Commission will set out formal proposals for banking union on September 12, when Commission President José Manuel Barroso makes his annual state of the union address. The drafting of the proposals has led to a battle of wills between national capitals and policymakers in Brussels.

If the ECB were to oversee all eurozone banks, it would give it responsibility for several thousand institutions, even if 95 per cent of eurozone banking assets are held by only around 200 banks.

Schaeuble has said he believes a narrow field of responsibility will give the ECB more opportunity to focus its efforts and get to grips with breaking the banking-sovereign links, succeeding where previous authorities have failed.

“The ECB has itself said it does not have the potential to supervise the EU’s 6,000 banks in the foreseeable future,” Schaeuble told German radio yesterday, saying a distinction should be drawn between small banks and major ones.

“With the bigger, systemically relevant banks ... there is a chance that direct supervision by the ECB could be realised in a foreseeable period of time,” he said.