BRUSSELS (Reuters) - EU finance ministers faced a struggle to reach a deal to force banks to set aside more capital to cushion future losses, with Germany warning an immediate agreement looked unlikely and Britain demanding stricter rules than those on offer.
The EU's 27 members are divided over how much capital lenders should have to set aside to cover risks, one of the central questions raised by a five-year-long financial crisis that toppled dozens of banks in Europe and the United States.
"I don't think we will come to a conclusion today," German Finance Minister Wolfgang Schaeuble said shortly before the finance ministers' meeting on Wednesday, adding the issue was complex.
"If we have too little capital, then the banks carry risks for the financial system. In order to stabilize the financial system, which is something that we are successfully working on, the banks must have more capital."
Denmark, holder of the bloc's six-month rotating presidency, has stepped up efforts to find a deal and Schaeuble said he believed agreement was possible in the coming months.
The meeting takes place as many of Europe's banks continue to struggle.
Standard & Poor's cut the credit rating of 11 Spanish banks earlier in the week, as Spain, the euro zone's fourth-largest economy, sank into a second recession in just over two years.
Spain's economy minister Luis de Guindos said bank capital rules were of critical importance for Madrid. "We need to guarantee to a level of quality capital that is enough to face future crises," he said as he arrived at the talks. "At this time of financial crisis, we need to clear up all doubts about the quality of European banks."
Denmark wants to find consensus among countries about new capital rules and strike an accord with the European Parliament by the end of June.
Its aim is to have a deal, translating higher capital standards set by the Basel Committee of regulators into EU law, and turn it into reality for banks by the start of next year.
Higher capital buffers strengthen banks to withstand shocks, such as the slump in property prices hitting Spain. Banks with higher-than-average capital, such as Switzerland's UBS AG UBSN.VX, can look more attractive for deposits because they are seen as offering greater security.
If financial markets shunned Italy and it needed emergency funding, for example, more capital would help banks resist contagion.
But the issue of bank capital has been divisive in Europe and many diplomats do not expect a deal on Wednesday.
British officials see the meeting as the first of several to discuss the issue. London is cautious about the new EU capital regime and does not want to sign away too much national control over its banks.
"The simple fact is that ministers haven't discussed this legislation in detail yet and we're likely to need more discussion before an agreement can be finalized," said one British diplomat, speaking before the meeting.
"You can't ignore the reality that the costs of getting this wrong are profound."
The next meeting of finance ministers is set for May 15.
Europe's capital regime, when decided, will be closely studied in Washington and may influence how policy makers there interpret the Basel standards.
EU countries have yet to signal whether they will back a push by the European Parliament to use the new capital law to curb pay, so a bankers' bonus could not exceed his salary.
At the heart of the dispute is the freedom EU countries have to enforce capital rules.
Britain and Sweden, which have two of the largest banking sectors in Europe relative to the size of their economies, want the freedom to take extra steps to make banks safer.
London and Stockholm argue they need to protect the interests of taxpayers who could be called on to bail banks out if they face collapse.
France wants capital standards to be more uniform across the EU and is concerned that international banks based in London could cut lending elsewhere in Europe if Britain forces them to beef up capital.
Some diplomats suspect the dispute is fuelled by concern that deposits and other business might flow to British banks were they to be better capitalized than French and German rivals and thus safer in the eyes of investors.
One compromise would be to allow a margin of flexibility so countries that want to can require banks to increase their capital buffers up to a certain limit, perhaps up to as much as 10 or 12 percent of risky assets for up to two years.
This compares with Basel's minimum of 7 percent.
Yet there is a split over whether the green light is needed from the European Commission, the EU's executive arm, before a country can require capital levels above the Basel minimum.
Handing more power to Brussels is an anathema to Britain, which is fighting to maintain its autonomy in policing the City of London, Europe's financial capital.
Additional reporting by Claire Davenport; Editing by David Holmes