Europe Economy

Europe rushes to seal banking union within 48 hours

EU banking deal a 'complex compromise': Swedish Fin Min
EU banking deal a 'complex compromise': Swedish Fin Min

European leaders are beginning a two-day summit on Thursday in an attempt to sign off on a banking union deal before the weekend.

Five years after the financial crisis struck the euro zone, European leaders are meeting in Brussels in an attempt to seal a deal that would create a single banking union in the region by 2015, envisaged as a supervisory system to police the region's banks and financially assist (or dismantle) them if necessary.

Banking union is seen as essential in restoring investors' faith in the euro zone after weak banks across the region, from Ireland to Spain, were hit by the financial crisis, dragging weakened sovereigns down with them.

Attempts to create a single supervisory system have not been simple, however, with disagreements ranging from who was to supervise the banks -- it will now be the European Central Bank -- to establishing a single fund to rescue failing lenders.

(Read more: EU leaders inch closer to banking union deal)

Under the deal, banks will provide the cash to pay for the closure of failed lenders, . But there is no agreement as yet on how to ensure there is enough money to deal with closures while the fund is being built up, or where it falls short.

For one, the euro zone's largest economy Germany remains very reluctant to make its taxpayers liable for losses incurred by banks in fellow euro zone countries. It wants the government of the country where a failing bank is located to cover any shortfall in rescue funds.

(Read more: EU banking union: What you need to know)

The two-day summit beginning on Thursday is an attempt to iron out those details. Swedish finance minister, Anders Borg, told CNBC he still had concerns over the complexity of the deal.

"We are still looking at a complex compromise that will not give a broad-based confidence boost to the recovery in the European economy. It's good and a positive sign that we're close to an agreement but the complexities are clear," he told CNBC in Brussels late on Wednesday.

There are growing concerns that a banking union will not be able to react quickly enough to salvage struggling banks, given the number of players and interests involved in the process of winding up a failing bank.

Bank backstops should only be used in crisis: Italian Fin Min
Bank backstops should only be used in crisis: Italian Fin Min

Borg said the process would require a lot of meetings and that this was a "major drawback" to the union. "We don't know how this will work in practice."

The President of the Eurogroup of finance ministers, Jeroen Djisselbloem, rejected concerns that the decision-making process in a pan-European banking union would be too slow.

"There are two ways we will make a decision [about winding up a failing bank]," he told CNBC in Brussels. "The vast majority of decisions will be taken by the executive board [of the ECB] and if there is no consensus there then the independent members will decide by simple majority."

"The second important agreement is that the executive director of the board will decide how much time we have to come to an agreement so if he says we have 24 hours, then it will be done in 24 hours. I'm quite sure it will be fine," Djisselbloem added.

- By CNBC's Holly Ellyatt, folow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld

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Bank backstops should only be used in crisis: Italian Fin Min
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