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FACTBOX-Europe tries to repair its broken banks

Tuesday, 10 Dec 2013 | 6:27 AM ET

BRUSSELS, Dec 10 (Reuters) - Europe is seeking to agree by year-end on how to close failing banks, part of an ambitious plan to create a single banking framework and fix lenders whose problems have festered since the financial crisis.

Here are the steps taken so far to impose order on Europe's financial system and draw a line under years of taxpayer-funded bailouts that have prompted public outrage:

* The European Union agreed in 2012 common rules for Europe's 8,000 banks to set aside more capital to cushion against losses. Higher buffers strengthen banks to withstand shocks, such as a slump in property prices or recession. Banks with higher-than-average capital attract deposits.

* Earlier this year, the European Commission, the EU executive, sharpened the bloc's state aid rules to share the costs of bank failures, stipulating that shareholders and junior bondholders will share the burden of saving a stricken bank.

* In March, the bailout of Cyprus set a new precedent for saving banks, by also forcing losses on senior bondholders and depositors with more than 100,000 euros ($135,000).

EU finance ministers agreed in June to adapt a similar but milder approach in EU law. The framework needs to be finalised with lawmakers in the European Parliament before coming into force.

* In September, Europe took a significant step towards a single banking framework for the euro zone, known as banking union. EU lawmakers granted new powers to the European Central Bank to oversee the currency bloc's 6,000 banks in 17 countries.

Supervision by the ECB is expected to start towards the end of 2014. Banking union is a process involving a single bank supervisor and a single resolution authority. A single deposit-guarantee scheme was also envisioned but is unlikely to materialise, however, and each country will be left to stand good for their own savers.

* Before the end of this year, finance ministers will try to establish a single euro zone authority to wind up bad banks, the proposed design of which is under discussion in Brussels. Germany, as Europe's largest economy, worries about being forced to pay up for other countries' banking losses.

* In addition, the European Central Bank will launch a series of health checks on euro zone banks, as part of its supervisory role. But if, as expected, it reveals the extent of bad loans at European banks, the bloc needs ways to repair its banks and recapitalise them.

A failure to put aside money to deal with the problems revealed could rattle fragile investor confidence and compound borrowing difficulties for companies, potentially killing off the euro zone's economic recovery.

(Reporting by Robin Emmott and John O'Donnell Editing by Jeremy Gaunt)