By Edward Taylor and Jonathan Gould

FRANKFURT - Leading German bankers clashed on Tuesday 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.

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 euro zone, though it was not considered systemically important by international regulators.

“No one had Bankia on the list to trigger a crisis,” he said.

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 euros ($126 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.

He also expressed concern that a common supervisor was a step on the path to a pan-European deposit guarantee scheme that would end up penalising strong institutions.

“The word banking union masks plans for a redistribution mechanism, whereby solid institutions prop up weaker lenders,” Fahrenschon said.

Speaking on a panel with Fitschen and Fahrenschon, Hans-Peter Keitel, president of Germany's biggest industry association, the BDI, appealed for German banks to find a “common voice” on banking regulation.

The bank supervision debate was launched in June, when European leaders met in Brussels and agreed to allow the euro zone's new permanent rescue fund to inject aid directly into troubled banks.

German Chancellor Angela Merkel insisted at the summit that this only be permitted once a centralised banking supervisor, housed in the ECB, was in place.

But it now seems clear that forging consensus, even within Germany, on what this supervisor should look like will be extremely difficult.

ECB officials have warned against overburdening the central bank with too many new responsibilities. And German Finance Minister Wolfgang Schaeuble said on Monday that the goal to have the new supervisory body up and running by January 2013 was unrealistic. Top officials in Brussels insist the self-imposed deadline is still valid. - Reuters