By Erik Kirschbaum
BERLIN, Sept 16 (Reuters) - European Commission president Jose Manuel Barroso distanced himself on Sunday from the idea that German savings deposits could be used to fund European bank rescues, potentially diminishing a major objection in Germany to a banking union.
Barroso told the Frankfurter Allgemeine Sonntagszeitung newspaper that German fears over centralising banking supervision in Europe are exaggerated.
Separately, Barroso also assured Germans that the European Commission will be closely monitoring the European Central Bank (ECB) and its bond-buying programme - and that the Commission will act against the ECB if it oversteps its mandate.
The ECB announced a potentially unlimited bond-buying programme on Sept. 6 to lower the borrowing costs of embattled euro zone countries.
"We believe the ECB is acting within the framework of its mandate," he said. "If the integrity of monetary policy is disturbed, the ECB has to restore it. If it were to overstep its mandate, we in the Commission would be the first to take action against it in the European Court of Justice."
German reticence over how quickly to centralise banking supervision stoked tensions with France on Saturday at a meeting of European Union finance ministers in Nicosia. France wants prompt implementation of a plan to tackle the financial crisis and underpin the single currency.
Addressing German concerns about supervision of all 6,000 banks in the euro zone, Barroso said the European Commission did not want to use German savings accounts deposits to guarantee savings deposits in Spain.
"These fears are totally exaggerated and have nothing to do with our proposals," Barroso told the Frankfurter Allgemeine Sonntagszeitung. "Our top priority is to create a unified supervisory mechanism for banks. Only on this basis will we be able to create confidence.
"Building upon that, we have to devote ourselves to a better joint management for banking crises, especially for an orderly liquidation of banks," he added.
"I do not want to take the savings deposits of Germans and use those to secure the savings deposits in Spain. That is unthinkable. We want to raise the stability of the entire banking sector in the euro zone. I'm quite certain that is in the interest of Germans and Germans with savings accounts."
The reform, which needs to be approved by the European Union's 27 member states, aims to break the link between struggling banks and indebted governments, an interdependence that has exacerbated the region's debt crisis.
By empowering the ECB to police all banks in the euro zone, the proposal from the European Commission hopes to break this vicious circle, laying the ground for deeper fiscal cooperation across Europe to underpin the euro currency.
Germany is keen to retain primary oversight for its regional savings and cooperative banks. It has questioned whether the ECB should get the authority to supervise all 6,000 banks in the euro zone, arguing that it would overstretch the bank.
Finance Minister Wolfgang Schaeuble has cautioned against expectations that a deal could be reached by the end of the year, a target set up euro zone leaders. Officials in Berlin say it would be better to proceed more slowly with the reforms to ensure a water-tight system is put in place.
Investors are following developments closely, as handing powers of supervision to the ECB unlocks the possibility of direct aid to banks in Spain, for example, from the euro zone's permanent rescue scheme, the European Stability Mechanism.
In contrast to Germany, France, where economic growth has ground to a halt since late last year and where banks have investments in struggling countries such as Greece, called for quick action.
Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the euro zone's 17 members that has frustrated investors and helped drive up borrowing costs for weaker states.