German parties reach deal on banking union: Sources

BERLIN (REUTERS) - Angela Merkel's conservatives and the Social Democrats (SPD) have struck a deal on the contours of a European banking union under which a body attached to European finance ministers, not the European Commission, would decide when to close failing banks.

Several sources involved in coalition talks between the parties told Reuters the two camps had also agreed funds from the European Stability Mechanism (ESM) should not be directly available for winding down financial institutions.

The sources said a number of legal questions needed to be resolved but the goal is to sign off on the agreement early next week so Finance Minister Wolfgang Schaeuble can go to a meeting with his EU colleagues on Thursday with a firm German position on the issue.

The EU wants to agree a deal on bank resolution by year end but uncertainty over Berlin's stance after September's election that led to complex coalition talks has sowed doubts about whether it can meet the deadline.

"The talks on this issue are going full steam ahead. Both parties are still far from an agreement on the questions of procedure and content," SPD spokesman Benjamin Seifert said.

In Brussels, a spokesman for Michel Barnier, the European commissioner responsible for the banking union reform, said he was open to the idea that the agency for the closure of failed banks would not be linked to the Commission.

After the ECB's demand on Friday for a single fund to pay for the cost of bank failures, she said this was important for the "credibility of the overall system".

The so-called Single Resolution Mechanism (SRM) is a pillar of a broader banking union that aims to break the "doom loop"between failing banks and sovereign governments - a major problem for the euro zone during its debt crisis.

The compromise stems from a meeting on Thursday between Schaeuble, his party colleague Herbert Reul and SPD politicians Peer Steinbrueck, Martin Schulz and Olaf Scholz.

It satisfies an SPD demand that the ESM not be used to wind down banks while addressing concerns in Merkel's conservative camp about giving the European Commission resolution powers.

The sources said until a common resolution fund, to be financed by the banks, had built up sufficient liquidity, national states would have to shoulder the burden of winding down their own banks. Should states run into financial problems, they could turn to the ESM for aid, as Spain has done.