UPDATE 1-EU leaders push banking union despite German reluctance
* EU leaders want agreement on single resolution mechanism
* Resolution law to be agreed with European Parliament by April 2014
* Germany says central bank resolution authority will need treaty change
* Mechanism to have funding from bank fees, backstopped by bailout fund
BRUSSELS, June 28 (Reuters) - European Union leaders said on Friday they want agreement by the end of the year on a way to resolve failed banks at European rather than a national level, signalling work should go on despite German objections ahead of elections in September.
German Chancellor Angela Merkel cast doubt on whether that timetable could be respected, saying the creation of a European authority with such powers would require a change to the EU treaty - a lengthy and politically risky process.
EU finance ministers agreed on Thursday on an intermediate step towards what is known as European banking union, which involves tighter oversight of banks and coordinated resolution of any problems. Under the deal, investors and wealthy savers will share the costs of future bank failures before taxpayers.
That moves the EU closer to drawing a line under years of taxpayer-funded bailouts that have caused public outrage.
But the law only sets common rules that national authorities in the 27-nation bloc have to follow when dealing with their own banks. It does not allow for sharing power or the financial costs of closing down or rescuing banks at EU level.
It is only a stepping stone to creating a central EU body to deal with failing banks, including big financial institutions that operate across national borders.
The European Commission, the EU's executive arm, is to propose how to create such a central agency, called the Single Resolution Mechanism (SRM), in July, although some officials indicate that it could be delayed beyond that date.
Merkel insisted that setting up a central authority with powers to close down banks in euro zone countries would require changing the EU's treaty, or else it could be challenged in Germany's constitutional court.
The European Commission believes no treaty change is needed and has floated the idea that it could itself take on the role of the resolution authority, to avoid the need to change laws for the creation of a completely new body.
But Berlin rejected that too.
"Germany has made clear that under the current treaties the Commission does not have the competence to run such a central authority or act as a resolution body. If we want new competencies then they must be linked to treaty changes," Merkel told a news conference after the summit.
France said work on the banking union should go as far as possible under existing treaties before considering any treaty change, but a treaty amendment could be done if necessary.
"If it appeared legally necessary to amend the treaty, we would do so, but it would only be from a legal perspective, and in no case from a political perspective," French President Francois Hollande told journalists after an EU summit in Brussels.
"Before we get there I think we must go as far as possible in the framework of existing treaties," he added.
WORK ON SRM SEEN STALLED BY GERMAN ELECTIONS
In an indication of acute political sensitivity on the issue, EU officials said Germany tried to have the term "banking union" removed from the final summit statement altogether.
"In this morning's draft conclusions the term banking union had disappeared and was replaced with more vague terms. We re-proposed our commitment towards a banking union," Italian Prime Minister Enrico Letta told a press conference after the summit.
But there will be little progress on the SRM until after the September parliamentary elections in Germany, which wants to avoid discussions that could involve any form of financial support for institutions in other countries.
Taxpayers across much of Europe have had to pay for a series of deeply unpopular bank and government rescues since the financial crisis erupted in Greece in 2010 and spread across the bloc and even threatened the survival of the euro.
The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis and - in the case of Ireland - almost bankrupting the country.
The SRM is to complement the work of the European Central Bank as the Single Supervisory Mechanism (SSM), responsible for looking after all euro zone banks.
"A fully effective SSM requires a Single Resolution Mechanism (SRM) for banks covered by the SSM. The European Council looks forward to the Commission's proposal establishing an SRM with a view to reaching agreement in the Council by the end of the year so that it can be adopted before the end of the current parliamentary term," the leaders said, using the careful legal language employed in summit declarations.
The final version omitted at German insistence a reference to the features the SRM should have that were enumerated in earlier drafts.
The deleted phrase said that the SRM should have "strong resolution powers, allowing quick, effective and coherent decision-making at central level".
The European Parliament has its last plenary session in mid April 2014.
The SRM is to have access to funds that it may need to help finance the restructuring or closure of banks, if losses imposed on shareholders and bondholders or even large depositors are not enough to cover the needs.
The central fund is to be built from fees paid in annually by banks, just like the national resolution funds created under the intermediate law. But until enough money accrues over the next 10 years, it may need to resort to the euro zone bailout fund for help.
The leaders remained vague on how the fund would work.
"It should include appropriate funding arrangements, based on contributions by the financial sector itself, and an appropriate and effective backstop which should be fiscally neutral over the medium term," they said.