UPDATE 1-Finnish PM downplays banking union forming this year

Thu Sep 20, 2012 5:13pm IST

(Adds Liikanen comment, background)

HELSINKI, Sept 20 (Reuters) - Finnish Prime Minister Jyrki Katainen has cast doubt on the creation of a European banking union this year, insisting any such group needs a clean slate so healthy banks do not suffer.

Finland has supported the idea of forming a united front among euro zone nations to protect their lenders but the proposal has divided opinion in the eurozone and worried neighbouring states who fear their banks may be affected.

Germany is pushing for only a small number of systemically-important banks to be subject to supervision by the European Central Bank (ECB).

Helsinki has been wary of increasing the burden on its relatively healthy financial institutions after its banks experienced a financial crisis in the 1990s.

Finnish voters have been critical of European bailouts as an easy way out for heavily indebted banks and governments.

Katainen said any banking union needed to s tart afresh so h ealthy banks d id not s houlder the burden for troubled banks.

"Rather large fundamental issues are still under consideration, so the target will be challenging if it is to be ready by the end of the year," he told a seminar on the euro crisis on Thursday.

B ank of Finland G overnor Erkki Liikanen, a member of the European central Bank's Governing Council, took a similar view in Finland's De mokraatti newspaper o n Thursday.

"The cooperation does not mean that those who have taken care of their business should take care of others' untreated matters. Here we have to be very careful," Liikanen wa s quoted as saying.

Under the plan, the ECB would be at the head of the currently fragmented system of national regulators, with the power to police, penalise and even close banks.

It would also gain powers to monitor banks' liquidity and demand they hold more capital to protect themselves against future losses.

Katainen said he saw no point in issuing common euro zone bonds and added that any bailout package would be better if decided unanimously rather than by majority vote.

(Reporting by Jussi Rosendahl, Editing by Belinda Goldsmith)