* EU ministers inch closer on who can close down banks, who pays
* Draft proposal charts part for sharing banks’ collapse
* Berlin demands treaty among states before tapping euro zone funds
By Emmanuel Jarry and Annika Breidthardt
BRUSSELS, Dec 10 (Reuters) - Euro zone countries edged closer on Tuesday to agreeing a plan to close ailing banks and sharing the costs, a move that would pave the way for a fundamental reform to underpin the currency and its banks.
After a financial storm that toppled banks and dragged down states from Ireland to Spain, countries examined a fresh blueprint outlining what to do when a bank fails, a critical second pillar of a wider reform dubbed banking union.
The draft plan, circulated among EU ministers at a meeting in Brussels, spells out how a new agency may close failing banks in the euro zone and crucially, how the cost can be shared out among countries in the scheme.
If agreed, this would overcome the long-standing objections of Germany and reinforce the scheme. But it remains to be seen if France, Spain and others will sign up.
Europe’s biggest economy has so far opposed the use of euro zone money to repair banks in countries such as Spain because it does not want to end up footing the bill.
In return, however, Germany wants a new treaty agreement between governments in the scheme, a step which will be cumbersome at the very least.
Furthermore, any such sharing of euro zone money should only be possible one decade after the start of scheme - set for 2015. Lastly, Germany wants to skew voting on some decisions about closing banks according to the size of the country.
The deal, which will not be finalised before next week, is to build the second pillar of the banking union, viewed as essential to shore up the currency-sharing group against future debt and financial crises.
Sealing an accord would draw a line under a financial crisis that toppled banks and dragged down governments from Ireland to Spain.
Building this union has proved divisive as it requires countries to surrender sovereignty and that they pay towards repairing banks in neighbouring states.
Financial markets have paid little attention to the debate but there is a risk that failure to reach a final agreement could be taken as a sign the bloc is not capable of protecting itself.
European leaders want a deal by the end of the year so that banking union can begin by 2015, including a quicker introduction of rules to impose losses on senior bondholders and large depositors in failing banks, as was done in Cyprus.
Such a move would satisfy Germany, which has for long called for such a fast-tracking of rules, which were originally planned only for 2018.
In the draft paper, officials proposed a starting date of January 2016, an acceleration that would have significant implications for bondholders as well as savers with more than 100,000 euros ($137,200) in their account.
“The council (of ministers) has sent a strong signal to markets that we want to protect taxpayers and that the time for bailout is over,” Germany’s finance minister, Wolfgang Schaeuble, told ministers earlier on Tuesday.
Such a move provoked a nervous response from a number of European Union finance ministers on Tuesday, worried that the rules’ early introduction could rattle markets.
Italian Finance Minister Fabrizio Saccomani made it clear that he would only support Germany in return for concessions on a common euro zone back-up plan for failing banks.
“We are available to discuss it ... if there is a single resolution fund and common backstops are clearly agreed upon and in place,” he told his peers in remarks broadcast to reporters.
A deal among governments on how to wind down banks by the self-imposed year-end deadline is important because it will allow countries to deal with potential problems revealed by a health check of banks by the ECB next year.
Failure to reach agreement would reflect badly on the bloc’s politicians, whose response to the crisis has at times been slow and chaotic.
“I would expect that ...we will manage to narrow down the differences today,” said Joerg Asmussen, a member of the European Central Bank’s Executive Board.
“I do not expect that we will reach a final agreement already today,” he said, adding that he had “pencilled in” another meeting of EU ministers before the bloc’s leaders meet on December 19-20.
The most contentious problems are: Who decides and who pays?
For the bank union to work, an agency has to get the power to close down a bank. Most countries would like this job to go to the EU’s executive arm, the European Commission.
But Germany, Finland and Slovakia would prefer such decisions to be made by all EU ministers, especially where the closure of the bank would require them to pitch in help.
The draft proposal leaves a question over the issue, proposing a number of different options when taking the decision to close a troubled bank.