* EU lawmakers, member states struggle to break deadlock on Basel
* EU's Barnier tells Fed's Bernanke of concern at U.S. delay
* Postponement threatens to undermine global capital accord
By John O'Donnell
BRUSSELS, Nov 27 Europe is preparing to follow the United States in delaying the introduction of stricter rules on bank capital, while it lobbies for a rethink of the U.S. stance, EU sources said.
The delay could push back the start of global rules in Europe, known as Basel III, by about six months, and that could be even longer if diplomats and lawmakers fail to break a deadlock on a law meant to be phased in from the start of 2013.
On the surface, the postponement would be good news for small banks in particular, because it would give them a chance to adapt to a complex new law still being finalised by EU member countries and the European Parliament.
But any hold-up would compound uncertainty following a U.S. decision to abandon the Jan. 1 2013 target, undermining the global Basel accord and promised capital reforms to prevent a re-run of the financial crisis.
"Whatever happens, the new law cannot become effective on January 1," said one EU official, who spoke on condition of anonymity. "The middle of the year would be a realistic assessment."
Brussels is also worried that the decision in Washington to ignore the deadline, which was set by the Basel committee of regulators for the capital regime they designed, will put EU banks at a disadvantage to U.S. rivals allowed to put off applying its strict standards.
The delay has caused concern in the EU's executive European Commission. Michel Barnier, the commissioner in charge of regulating finance, has written to U.S. Federal Reserve Chairman Ben Bernanke to express his worries, officials said.
In his letter, a copy of which was also sent to U.S. Treasury Secretary Timothy Geithner, Barnier pushes for clarity on when Washington will introduce the capital rules and flags the risks if the United States and Europe take different tacks, people familiar with the matter told Reuters.
"The U.S. is dragging its feet, which is not fair," said one of the officials.
But privately, many officials in Brussels concede that the same is likely to happen in the 27-member European Union and that the bloc will also be forced to delay implementation, marking a further setback in efforts to reform finance.
By standardising EU capital rules, the law would also make it easier for the European Central Bank to supervise lenders, the first step towards a banking union - a cornerstone of closer fiscal integration in the euro single currency area.
"In practical terms, it seems to be impossible to do something that is implemented by January 1 but officially that hasn't been said," said a senior lawmaker in the European Parliament.
Banks have been pushing for a delay of the new rules until the beginning of next year, arguing that the U.S. move would put them at a disadvantage.
The global accord hatched by central bankers and regulators meeting in Basel, Switzerland, demands that lenders set aside more capital to cover losses such as unpaid loans.
It also lays down higher standards in determining what kind of assets a bank can use to meet these capital levels, such as limiting the use of hybrid debt that banks previously relied on, but which unravelled in the crisis.
The European Union is struggling to agree on many aspects of the package, including what kinds of assets can be considered liquid, or available at short notice.
The European Parliament is also demanding tough limits on bonus payouts in the EU law that introduces Basel, a demand that has irritated countries such as Britain.
After months of tortuous, often late-night negotiations between the parliament and EU member states, issues such as bonus caps remain unresolved and agreement on the broader rules has yet to be reached.
"There is a general feeling in the context of the euro zone crisis that not only is there a democratic deficit, but also an executive deficit. The institutions are just not able to take decisions," said Nicolas Veron of Brussels think tank Bruegel.
"We see that in the crisis, with Greece and the euro zone, but also on issues such as Basel," he said.
The drawn-out process of signing off a law has also frustrated regulators. "This is not a good situation," said one. "They are holding themselves up for ridicule if they don't adapt on time."
Europe's capital regime, when decided, will be closely studied in the United States and may influence how policymakers there interpret the Basel standards, while investors are eager to see the European Union repair its vulnerable banking sector.
The crisis in Europe's banks and parallel attempts to agree a host of other contested reforms, such as new rules to control spending by euro zone governments, has held up agreement.
Pointing to the long-running crisis, which in Europe began with the near-collapse of German bank IKB, Veron said: "The more serious problem is that after five-and-a-half years since IKB, the EU is still in a systemic financial crisis."