Euro Zone Set For Drawn-Out Battle Over Banking Rules

More than five years into a financial storm that toppled banks and dragged down states fromIreland to Spain, Europe wants to seal its biggest project since the euro - a framework to police banks and tackle their problems together.Ministers have 36 hours to clinch agreement on an agency and fund to shut weak banks to complement European Central Bank supervision of the sector, in time for European Union leaders to sign off on it this week.

But discussions over a banking union have already dragged on for the best part of a year and are growing ever more complex as they reach their climax.

Wolfgang Schaeuble, Germany's finance minister, sounded a downbeat note before the meeting, saying there was no consensus.

"The work remains difficult but we have made a lot of progress but we have different opinions on several points. So we have to see whether we can come to a common outcome. I hope we can solve those issues so we can reach a common position," he told reporters.

The sense of urgency ahead of the self-imposed year-end deadline was highlighted by Jeroen Dijsselbloem, who chairs the meetings of euro zone finance ministers.

"We have to get a result first, so I'll go in," he said.

Olli Rehn, the European economic commissioner who is at the talks, called for everyone to redouble their efforts in order to have "Christmas peace".

"I believe it is in everybody's interest to go the last mile today, tomorrow and finalize the work this week in order to have a political agreement. That would give us a good Christmas and Christmas peace and I trust everybody would work to that effect," Rehn said.

Ministers have already agreed on the first plank of banking union, making the European Central Bank supervisor of the region's largest banks from the end of 2014.

But the second pillar - an agency for winding up problem banks and a fund to pay for the clean-up - is difficult.

Germany, the euro zone's largest economy, has raised the greatest concerns about the fund, which it fears is a step towards sharing costs of problem banks across the euro zone.

With divisions running deep, ministers may sidestep this thorny issue.

There is also a question mark over the new procedure for closing a bank. Documents circulating among diplomats and seen by Reuters show an increasingly complicated structure emerging.

"The proposal on governance looks very complicated. In resolving a bank, one would want to be able to do it over a single weekend at the maximum time span. So anything that is too cumbersome, with various layers to it, I don't think would be effective," said Michael Noonan, finance minister for Ireland, which saw its economy almost collapse after its banking crisis.

A general agreement among the ministers is all that is needed to start negotiations with theEuropean Parliament on the legislation.

On Wednesday, ministers from the wider EU will join the group to discuss who will have the power to close down a laggard bank in the euro zone. On Tuesday, the talks are focusing on who pays.

Under draft plans, banks will provide the cash to pay for the closure of failed lenders, giving roughly 55 billion euros ($76 billion) over 10 years.

But ministers cannot yet agree how to ensure there is enough money to deal with closures while the fund is being built up or where it falls short.

Germany wants the government of the country where the bank is based to provide the missing cash, or borrow it from the euro zone's bailout fund, the 500-billion-euro European Stability Mechanism, as Spain did in 2012.

But France worries that would conserve the vicious circle of weak governments trying to support weak banks, the very link the euro zone has said it wants to break via a banking union.

Many policymakers believe the solution is to allow the bailout fund to act as a backstop. Germanyopposes that.