(Adds Merkel on EBA new home)
By Huw Jones
LONDON, May 31 (Reuters) - The European Union's banking watchdog said a merger with its insurance counterpart would yield few savings as staffing was already cut to the bone in core areas.
The European Banking Authority (EBA) said a suggestion by Brussels that it should be merged with the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt was "unlikely to create significant synergies in the core business" of regulation and supervision.
The European Commission has held a public consultation on the future shape of financial supervision in the EU, made more urgent now that the City of London, the bloc's biggest financial market, will be outside the EU in 2019.
The Commission aired a "twin peaks" model of centralising capital requirements for banks and insurance at a merged EBA/EIOPA in the German financial capital. Finance industry conduct would be overseen by the European Securities and Markets Authority (ESMA) in Paris.
EBA said there could be savings from a merger in areas where it is understaffed, such as in economic analysis and data management.
"However, no material benefit in terms of reduction of costs in corporate functions is envisaged, as resources in these areas are already very slim," EBA Chairman Andrea Enria said in a letter to the Commission.
EIOPA said in its response that changes to the supervisory set-up should be assessed "carefully to ensure the continuation of an effective holistic and integrated approach".
The London-based EBA must move to another EU state in any because of Brexit and several countries are jostling to become its new home.
German Chancellor Angela Merkel said on Wednesday that Frankfurt was entitled to host the EBA because it was already a major financial centre.
"(We feel) predestined to host the European banking supervisor because with Frankfurt, we already have a proper centre," Merkel told a banking conference in Berlin.
In its response to the Commission's consultation, ESMA said it wanted a string of new powers, while the EBA and EIOPA called for generally modest additions to their armoury.
The EBA said that since the Frankfurt-based European Central Bank, which has far greater resources, began supervising banks in the euro zone, the watchdog has suffered a "loss of visibility."
"Such arrangements might be reconsidered, as they generate an artificial disconnect between regulatory and supervisory functions," Enria said. (Reporting by Huw Jones; Editing by Toby Chopra and Jane Merriman)