Germany's markets regulator signaled support for the proposals of an EU advisory group led by Bank of Finland Governor Erkki Liikanen, which called last week for banks' deposit-taking business to be legally separated from higher-risk activities.

"Liikanen's approach is very much worth considering," Bafin chief Elke Koenig told reporters on the sidelines of a banking event on Monday.

His proposals "differentiate much more" than the findings of the Vickers Commission in the UK or the Volcker Rule in the United States, according to Koenig.

One of the attractions of Liikanen's ideas is that they do not seek to dismantle the universal banking model, she added.

"One of the main questions to resolve is whether a bank doing a hedge is doing this for itself or on behalf of a client. I believe this can be defined, but the devil is in the details," said Koenig.

She declined to say whether Bafin would approve the BHF acquisition by RHJ, nor did she comment on the ongoing Libor probe.

Koenig sharply criticized the lack of progress in setting up a single banking supervisor in the euro zone.

"I support the idea of a strong European regulator. But I have not seen a roadmap of how we get there," the Bafin chief said, commenting about efforts to centralize banking regulation at a pan-European level.

Policymakers regard ECB supervision as a pre-requisite for the direct recapitalization of struggling banks. While this is expected to be in place from early next year, there are differences over what steps need to be in place first.

"The last thing we can afford is to have an interregnum between those who are no longer responsible and those who are not yet in a position to act," the head of Germany's markets regulator said.

Germany wants to keep oversight of its regional savings and cooperative banks and has long had doubts about the wisdom of direct bank recapitalization.

It has questioned whether the ECB should spread itself so thinly, preferring the ECB to take charge of major systemic banks, not all 6,000 lenders.

(Reporting By Edward Taylor; Editing by Kenneth Barry)