The EU faces weeks of hard bargaining before a banking union puts the banks of the 17 countries that use the euro under the authority of the ECB next year, giving the Frankfurt-based ECB unprecedented new powers.
Countries like Britain - the EU's biggest banking centre - which are in the 27-member EU but do not use the single currency fear the ECB would be able to impose its will on bank regulation across the entire bloc.
Britain favours keeping powers with the European Banking Authority, a pan-EU body based in London, and imposing safeguards to prevent the ECB from dominating the EBA's decision-making.
The European Union's executive European Commission, which will publish its blueprint for the banking union tomorrow (12 September), has proposed safeguards in a leaked draft but a source familiar with the British negotiating position cast doubt on whether those would be enough to satisfy London, Reuters reported.
Among the safeguards proposed by Brussels in a draft law that will be unveiled on Wednesday, two of six members of the governing board of the EBA, which sets rules for the entire EU, would come from EU countries that do not use the euro.
A new panel of "independent experts" would also have the power to make recommendations on EBA action in emergencies and cases of rule-breaking, which would be binding unless the EBA overrules them in a vote that includes three non-euro members.
But the ECB will still be able to coordinate voting at the pan-EU regulator on behalf of the 17 countries that use the euro, giving it power that Britain and other non-euro members will find hard to swallow, banking regulation experts said.
"If all that is being talked about is two people on the management board, one should expect that the non euro zone states will be restrained in their enthusiasm for that solution," said Tom Huertas, a consultant with Ernst & Young and former vice chair of the EBA.
"What matters in the EBA is the vote and if the ECB votes on behalf of all 17 euro zone member states, the ECB will win every time hands down," Huertas said.
The EBA approves new rules for all EU banks by qualified majority, with votes based on a member state's size. That means the ECB, casting the euro zone's votes as a bloc, could push through or block technical standards, despite the safeguards.
London has said it wants assurances that the ECB will not have powers over non-euro zone banks. Britain has yet to comment on the latest proposals publicly, but is expected to respond after the draft is published on Wednesday.
"If I were the UK government, I would be looking for greater safeguards," said Michael McKee, a financial services partner at DLA Piper law firm in London.
The ECB declined to comment on the proposals before they are formally unveiled on Wednesday.
Tough bargaining ahead
Under the banking union, the ECB will become the lead supervisor for euro zone banks, taking on many tasks now handled by national regulators such as setting capital levels. It will then delegate the routine tasks back to local supervisors.
European leaders say the banking union is necessary to protect the financial system across the single currency zone during the debt crisis.
The EBA would continue to write pan-EU standards and check there is harmonised supervision across the bloc, but would shift its supervisory focus to non-euro zone banks and their links to the single currency area.
The huge banking industry in London means Britain has most at stake, but it is backed by other non euro zone countries like the Czech Republic, Denmark, Poland and Sweden, who also want to make sure the ECB respects the single market and is accountable.
Non-euro eastern European countries, for example, are concerned about the ECB's authority reaching into their banking sectors, large chunks of which are owned by euro zone banks.
The draft law, which will be unveiled on Wednesday, still must be discussed by EU states and the European Parliament. Haggling and changes are inevitable.
Britain may find it hard to impose tougher safeguards, as its non-membership in the euro has often left it on the sidelines in EU financial rulemaking, with countries like Germany, which has little faith in the EBA, in the driving seat.
Nevertheless, the draft law that confers the core euro zone supervisory role on the ECB will need unanimous backing of all 27 EU states to come into force next year, giving London and its allies some leverage.
However, even the strongest safeguards will not stop the ECB from gaining new clout when it takes charge of 6,000 banks across 17 countries.
"Even if you got added protections, it would still mean the ECB would have an increasingly powerful role within the EBA as it will be as much about influence as actual powers," McKee said.
On the other side, supporters of the ECB as a strong single regulator say there is no point in leaving powers in the hands of the EU-wide EBA, which would cause confusion.
"It does not make sense to be keeping some supervisory tasks for the EBA. I think the ECB will be furious about this," said Karel Lannoo, chief executive of Brussels think tank CEPS.
The bloc's financial services chief Michel Barnier had wanted the EBA to become the core of a banking union, but was rebuffed by Germany which backed the ECB for the job. The EBA is an agency of the European Commission, with its decisions ultimately having to be endorsed by the EU executive.