By Huw Jones
LONDON (Reuters) - A proposed agency with sweeping powers to close failing banks in the European Union would violate the bloc's founding treaties and must have its authority narrowed or shared with a core EU institution, a legal document showed on Monday.
The so-called single resolution mechanism was proposed by the EU's executive European Commission in July and is a central plank in efforts to stabilise the region's banking system.
The aim is for an EU-level agency to have powers to wind down failing banks quickly, free of national vested interests which in the past have delayed intervention and helped to prolong the sector's uncertainties for investors.
The EU proposal calls for setting up a new agency with a board but the legal advisers to the bloc's member states say in a document seen by Reuters that the planned agency cannot have such wide discretion under EU treaties.
"The legal service considers that the powers which would be conferred by the proposal on the board... need to be further detailed in order to exclude that a wide margin of discretion is entrusted to the board," the opinion of the legal advisers dated October 7 and seen by Reuters said.
Failing that, the EU would have to "involve in the exercise of those powers an institution of the (European) Union vested with executive competences," the document added.
The single resolution mechanism is one of the building blocks of a European Banking Union in the countries that share the euro currency.
The first stage involves the European Central Bank directly supervising top euro zone lenders. It was meant to start early next year but has now been delayed until the end of 2014.
The legal opinion may force a rethink of the resolution proposal, creating fresh delays.
There has already been hostility from some countries to giving the European Commission, which has the executive competences the legal opinion refers to, a central role in deciding when a bank must close.
There is also some opposition to giving the ECB this role, with critics fearing it would conflict with supervisory tasks.
The legal opinion looked at case law from the bloc's top court, the European Court of Justice, in particular the "Meroni" case of the late 1950s just after the EU's forerunner was launched.
Meroni set parameters on the "balance of powers" between EU institutions such as the European Commission and how much policymaking discretion agencies could have.
(Reporting by Huw Jones; Editing by Lisa Shumaker)