Europe considers new agency to shut failing banks

BRUSSELS (Reuters) - Banks under the watch of the ECB that run into difficulty could be shut by a European agency, under a proposal that is set to rouse opposition in euro zone capitals.

European officials are seeking to design a scheme to close troubled banks to complement a contentious new system of supervision in the euro zone led by the European Central Bank.

The first leg of this banking union is due to be completed next year when the ECB takes on the supervision of banks. Now negotiations are under way to build the second leg - an agency to close banks with a central fund to cover the costs involved.

The European Commission is drafting the plan and, on Wednesday, commissioners from each of the European Union's 27 members met to discuss an early outline of the blueprint seen by Reuters.

In it, officials suggest giving the European Commission and a newly-created agency powers to close banks were the ECB to spot a problem and, in the words of one person close to the matter, "ring the bell".

There would also be an industry-sponsored fund to pay for the clean-up or 'resolution' although it is unclear who would cover such costs during the years when this is being built up.

The Commission will have to tread carefully to avoid its proposal being dismantled by European countries, who must approve it before it becomes law.

Germany, in particular, is wary of any scheme that could empower a foreign agency to force the closure of one of its banks. Berlin would also oppose any fund that require it to pick up part of the bill if a bank in Spain, for example, ran aground.

Germany's chancellor Angela Merkel recently appeared to clear the way for the next stage of a European banking union by accepting a "resolution board" involving national authorities to take decisions on winding up failed banks.

It is unlikely, however, that Berlin would accept the creation of a new agency in Brussels or elsewhere with powers to overrule its own national authorities on the sensitive issue of whether to save or close an ailing bank.

Designed to secure a level playing field in the euro zone and prevent vulnerable countries having to contain financial problems alone, a European banking union was one of the biggest political commitments made to underpin the euro.

But the botched handling of a levy on Cypriot bank deposits agreed as part of the country's stringent bailout has dented confidence that Europe will unite in tackling bank problems.

(Reporting By John O'Donnell, Jan Strupczewski and Martin Santa; Writing by John O'Donnell; Editing by Ruth Pitchford)