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European rift clouds future of executioner for failed banks

By John O'Donnell and Robin Emmott

BRUSSELS (Reuters) - A rift in Europe over how best to control its banks has raised a question mark over how far the bloc is willing to go in setting up a new agency to shut stricken banks.

The European Commission, the EU executive, will outline its blueprint for an agency to close or salvage troubled banks on Wednesday - the second pillar of a so-called banking union, chiefly in the euro zone.

Designed to prevent vulnerable countries having to contain financial problems alone, a banking union to forge a common front to backstop banks in trouble was one of the biggest commitments made at the height of the currency bloc's debt crisis.

But the Commission, which depends on the backing of all European Union member states to turn its proposal into law, faces an uphill battle in giving the agency clout to brush aside national authorities when closing a bank.

It is unlikely that Berlin would accept the creation of a new agency in Brussels or elsewhere with powers to overrule its own national authorities on the sensitive issue of whether to save or close an ailing bank.

Berlin would also oppose any fund that requires it to pick up part of the bill if a bank in Spain, for example, ran aground.

Division between euro zone members was visible again on Tuesday at a meeting of the bloc's finance ministers, with Germany urging a cautious approach when establishing the body and France emphasizing the need to wrap up the matter speedily.

Germany's Finance Minister Wolfgang Schaeuble said he wants changes to the European Union's treaty that underpins EU legislation, a procedure that could take years. That appears to be a cover for a watered-down reform, some officials say.

"As long as we cannot amend the EU treaty, we must stick to the legal basis we have, otherwise we will fail," Schaeuble said, during part of the meeting that was broadcast.

"I would strongly ask the Commission in its proposal for an SRM (single resolution mechanism) to be very careful and stick to the limited interpretation of the treaty," he said.

SECOND THOUGHTS

His French peer, Pierre Moscovici, speaking immediately after Schaeuble differed strongly, saying that an agreement on the agency should be wrapped up by the end of the year, although he did not tackle directly the issue of EU treaty change.

"On the issue of a resolution mechanism, we clearly want an agreement ... by the end of the year," Moscovici said.

"It hasn't been easy so far, we've worked by day and sometimes by night, so we must prepare ourselves. But we must be back here by the end of the semester (to reach a deal)," he said, referring to the all-night sessions that ministers have subjected themselves to so as to agree parts of banking union.

The new agency, with the power to close banks, would work together with the European Central Bank.

The ECB will take on oversight of all banks in the euro zone from late next year, completing the first pillar of banking union. If the ECB spots a problem, it would raise the alarm and could trigger the closure of a bank. That task of executioner would be carried out by the new resolution agency.

There would also be an industry-sponsored fund to pay for the clean-up or resolution, although it is unclear who would cover such costs during the years when this is being built up.

The Commission will have to tread carefully to avoid its proposal being dismantled by European governments.

The botched handling of losses imposed on Cypriot bank deposits - part of the island's stringent bailout - dashed any hope that European governments would unite to shoulder the cost of a country's bank problems.

"Germany has been having second thoughts," said Karel Lannoo of think tank, the Centre for European Policy Studies, commenting on the creation of a new agency. "It sees how it will impact on its sovereignty."

(Editing by Susan Fenton)

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