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Jealous of its small but stable banking sector, the Czech government is ready to block the proposed EU banking union, Prime Minister Petr Necas threatened on October 17.

Speaking at a press conference, Necas said he will stand in the way of establishing a unified bank regulator in the EU unless proposals that the Czech believe threaten the stability of the Czech financial system are resolved, reports CTK. The banking union is set to be discussed at a summit in Brussels on October 18 and 19.

"A total of 95% of the Czech banking sector is controlled by foreign parents - this must lead us to being very cautious as regards regulation," Necas said. "What we want is to ensure guarantees for the domestic sector, and we can therefore hardly agree with, for example, mutual loans. If the banking union was submitted for approval in its current form, we would undoubtedly veto it," he said. The cabinet also considers January 2013 as an unrealistic date for the launch of the surveillance system, Necas added.

Conservative banking activities, added to the careful behaviour of customers, has made the Czech banking sector one of the most stable in Europe. Although troubled European banking groups dominate the market, it faces little threat thanks to a loans/deposit ratio well under 100%.

On the one hand then, it's little wonder the government doesn't fancy throwing it into a melting pot with the crumbling banks in many other EU countries. "We are among the three OECD countries that did not have to provide banks with money. Deposits exceed the volume of loans and we have high-quality supervision," Necas pointed out.

The PM's stance is backed by other major economic and banking bodies. The Czech National Bank has repeatedly expressed scepticism about unified bank surveillance in the EU, while the Association of Czech Exporters on October 17 called on the government to prevent the Czech Republic's entry into the banking union "by all possible means".

The Czech Republic's inclusion in the union could pose a direct threat to the health of leading banks and most export-oriented companies in the country, Association of Czech Exporters insisted in a statement. "Our banks already once went through purification which cost taxpayers over CZK500bn. Stop the situation, that would probably have much worse economic impacts, from happening again," it urged.

At the same time, the high degree of foreign ownership in the Czech market represents the most significant risk, and the goal of supporting the EU's large banking groups is clearly in the country's interests. Ongoing pressure on the parent banks will lead them to step up efforts to look to local units for capital.

The strengthening of bank surveillance would give the European Central Bank new supervision powers over 6,000 banks in the Eurozone, according to proposals of the European Commission. The step should be one of the main pillars of the banking union. Among the other pillars would be a shared deposit guarantee system and a fund dealing with problems of banks. However, the Commission has not presented the proposals of the other parts of the system yet.