* Finance chiefs to seek deal on who should shut bank
* Countries also to decide how to pay for winding-down
* Deep divisions over scheme remain
By John O'Donnell and Jan Strupczewski
BRUSSELS, Dec 6 (Reuters) - European ministers make a fresh
attempt next week to agree a blueprint to close failing banks
but progress is uncertain as the fundamental questions of who
gets the power to close a bank and how to pay the bill remain
open.
As the dust settles from a financial storm that toppled
banks and dragged down states from Ireland to Spain, the
question of what to do when a bank fails remains controversial.
On Tuesday, European finance ministers will negotiate how to
create an agency to close euro zone banks and a fund to pay for
the clean-up - completing a new system to police banks and
prevent a repeat crisis.
This part of a 'banking union' is as divisive as it is
ambitious. It requires countries such as Germany to surrender
sovereignty to this European agency and could demand they pay
towards repairing banks in neighbouring states.
European leaders want a deal by the end of the year so that
the banking union can become reality from the start of 2015,
raising investor confidence and helping bank lending.
Some officials are optimistic that this could happen on
Tuesday. "Having listened to a number of key players, I am
confident that an agreement can be struck," one senior euro zone
official involved in the talks said.
But others speculate that another gathering of finance
ministers on Dec. 18 might be necessary.
German and French finance ministers were expected to meet
later on Friday to advance talks on the issue.
After weeks of wrangling ahead of the meeting, differences
between euro zone countries remain.
Germany, which neither wants to surrender control of its
regional savings banks to European bureaucrats nor end up
footing the bill for failures elsewhere, is treading carefully
not least because a coalition deal to form the next government
has yet to win final approval from the Social Democrats.
Berlin would rather see European countries decide the fate
of failing banks and exclude its regional banks from the scheme.
It does not want the European Commission to do the job.
With so much at stake, it may fall to Europe's political
leaders, including German Chancellor Angela Merkel and France's
Francois Hollande, to negotiate an agreement when they meet in
Brussels on Dec. 19-20.
OBSTACLE COURSE
The European Central Bank, which is due to take on the
supervision of big banks in the euro zone towards the end of
next year, is watching apprehensively.
ECB President Mario Draghi underscored the importance of
banking union this week, the most far-reaching reform since the
euro was established, when he told journalists that it was
necessary to "restore confidence".
But the path to completing it is strewn with obstacles, and
time is running out for the ministers to strike agreement. One
of the most sensitive questions is how to deal with banks so
badly wounded that they need to be closed.
The ECB wants a new 'resolution' agency that is independent
of political interference to prevent a repeat of the chaos that
surrounded the collapse of banks such as Franco-Belgian group
Dexia that were active in many countries.
But negotiations in Brussels are moving in the opposite
direction. Draft proposals seen by Reuters show diplomats are
setting up an unwieldy system that would involve every EU
country, the Commission and the ECB in any bank emergency.
Their notes, decisions and proposals could go back and forth
for days, it said.
"The U.S. agency has 48 hours to resolve a failed
institution," said one official, familiar with the talks. "The
complicated European decision-making structure barely enables
such a quick decision."
EMPTY WAR CHEST
There are other open questions, such as who should pay for
winding down banks.
While bank closures should ultimately be paid for by a
banks-funded war chest, that will be empty for many years.
In the meantime, countries will have to decide who pays.
Germany, however, is reluctant to allow Spain or others tap
European money for this purpose.
It also does not want to use the euro zone's rescue fund,
the European Stability Mechanism, to lend money for tackling
failing banks.
Berlin may concede on this point but only if other countries
agree to fast-track rules that would allow the imposition of
losses on bondholders and large depositors of failed banks,
similar to the harsh methods used when bailing out Cyprus.
Those rules are now pencilled in for 2018. Berlin, keen to
prevent a repeat of the trillions of euros of state bank
bailouts, wants the law from 2015. Many officials say 2016 is
the more likely compromise date.
(Additional Reporting By Martin Santa; Editing by Susan Fenton)
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