Leading German bankers yesterday clashed over plans to give the European Central Bank new supervisory powers, with the co-head of Deutsche Bank saying oversight would only work if it covered a wide range of banks, not just Europe’s biggest.

If we in Germany argue that we are different, we invite other countries to also argue for exemptions

The comments by Juergen Fitschen at a banking conference in Frankfurt highlighted a major divide in Germany, Europe’s biggest economy, over the scope of the ECB’s new powers.

The European Commission also wants the Central Bank to monitor a broad swathe of banks but the German Government and the country’s smaller banks are pressing for a more limited remit, focused only on those banks considered “systemically relevant”.

The row has burst into the open a week before the Commission unveils new proposals for creating a “banking union” in Europe, a step seen as vital for breaking the link between failing banks and indebted governments.

Fitschen said it was illusory to believe that problems could be avoided just by monitoring big banks like Deutsche, noting that Spain’s Bankia ended up becoming a national problem for Spain and the broader eurozone, though it was not considered systemically important by international regulators.

Bankia, nationalised by the Spanish Government in May, is emblematic of the sector’s reckless lending during the country’s property boom. Spain is now seeking a euro zone bailout of up to €100 billion for its troubled banks.

Smaller German savings and cooperative banks say they need only be regulated on a national level, but Fitschen warned against the consequences of such an argument.

“If we in Germany argue that we are different, we invite other countries to also argue for exemptions,” Fitschen said.

Georg Fahrenschon, president of the association of German savings banks, however, told the conference that saddling the ECB with hundreds or even thousands of banks to monitor would be onerous and counterproductive.

“Sometimes I get the impression that the whole exercise is designed to unload so much routine work onto the ECB so it no longer has the time or capacity to properly scrutinise the really dangerous institutes,” Fahrenschon said.