March 12, 2014 / 6:50 PM / in 4 years

Europe fails to bridge divide on banks reform

* Scheme to shut bad banks final pillar of banking union

* Lawmakers and countries disband with no deal

* Talks to resume as time runs out to seal new law

By John O‘Donnell

BRUSSELS, March 12 (Reuters) - Europe appeared far away from making good its crisis pledge to tackle weak banks as lawmakers and country representatives failed on Wednesday to bridge differences over how to close down troubled lenders.

Concluding the third day of unsuccessful talks on the ambitious political project, negotiators disbanded still in disagreement over central elements of banking union, a scheme to police banks and shut those too weak to survive.

Sharon Bowles, a British member of the parliament involved in the talks, said by Twitter that talks would resume next week “after more thought on key points”.

It remains unclear, for example, the degree to which countries will help each other tackle problem banks under the plan intended to break the link between indebted states and the banks that buy much of their debt.

Talks will resume in the coming days. But the rocky progress raises a question mark over a project to allow the European Central Bank to supervise the sector, creating an agency to close failed banks and a fund for clean-up costs.

It could fall to European Union leaders, who meet in Brussels on March 20-21, to decide.

Time is running out because the parliament is disbanding for May elections. Failure to seal a deal before April would mean months of delay and uncertainty given an expected rise in the number of eurosceptic lawmakers after the poll.

Joining forces across the euro zone had been the original intention when banking union was pledged at the height of the bloc’s sovereign debt crisis. But as markets have calmed, Germany, which does not want to be on the hook for problems in Spain or elsewhere, has dug in its heels.

Earlier this week, Spain and the Netherlands failed to win over Germany to support the ‘resolution’ fund from its outset, when it will be small. Instead the fund will likely be allowed to borrow on the markets against future levies on banks but with no special government support.

There has been some progress in addressing the concerns of lawmakers about the scheme but they have said they still believe it is too laborious and politicised.

EU countries, for example, have reduced the scope of countries to meddle in decisions by the agency to shut a bank, as well as changing voting procedures to make it easier for the agency to operate. Lawmakers want further evidence the agency will be independent.

While France and Spain see banking union as a step towards sharing bank risks with Germany and advancing towards a common cost of borrowing across the euro zone, Berlin places greater emphasis on imposing losses on the creditors of laggard banks.

New lending has been throttled by banks’ efforts to raise capital and cut their risks during a recession, especially in countries hit hardest by the sovereign debt crisis.

Euro zone banks now hold about 1.75 trillion euros ($2.4 trillion) of government debt. This helps explain why countries are reluctant to cede authority to Brussels on bank closures.

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