PREVIEW-EU deposit insurance debate could be linked to bank sovereign exposure -official

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BRUSSELS, March 28 (Reuters) - There might be some progress in the stalled debate on a European bank deposit insurance scheme if it can be linked to plans that would limit how much of some euro zone government bonds banks can hold, a senior euro zone official said.

The European Deposit Insurance Scheme (EDIS) is the missing piece of the European Union's plan for a banking union. The bloc has already set up a single bank supervisor and a single bank resolution authority with a dedicated pool of money.

Pan-EU supervision, resolution and deposit insurance is intended to make the banking sector more resilient to future shocks, making it less likely that taxpayers will have to bail out failing banks.

But Germany is opposed to taking the last step of setting up EDIS now, worried that in some countries banks are still exposed to high risks because of past investment and credit decisions.

That could mean Berlin might be called upon to help repay depositors in failing banks elsewhere, notably in Italy.

Germany wants those risks substantially reduced before it shares responsibility for deposits across the euro zone.

But other countries argue that setting up EDIS would in itself substantially reduce the risk of bank runs and therefore bank failures.

The discussion has been stalled since 2015.

"We decided to try to break the deadlock on EDIS by broadening the subject," a senior euro zone officials involved in the discussions said.

This involves linking EDIS to a discussion about limiting banks' exposures to the debt of a single sovereign borrower, usually the bank's home country. The proposal would see different risk weights attached to euro zone government bonds in banks' investment portfolios.

The approach aims to reconcile two camps among euro zone policymakers -- one which wants to set up EDIS first and deal with sovereign exposures later, and the other, which wants to deal with these issues the other way around.

EU leaders have asked euro zone finance ministers to come up with some ideas on how to move forward on EDIS by June.

"By broadening the discussion I hope we can make a deal easier. It seems to work well, it does not mean we will have an agreement in June, but these are interesting discussions that are delivering some results," the official said.

The issue will be briefly discussed at the next meeting of euro zone finance ministers in Bucharest on April 5, after a more substantial debate about the governance of a future euro zone budget that is to be created from 2021.

EU leaders asked last December for the euro zone-specific pool of money to be created "in the context of" the EU's seven-year budget. Finance ministers in Bucharest will discuss how such a budget could be steered by leaders of the 19-country euro zone only while remaining part of the wider EU legal framework that applies to all of its 28 members now.

The senior official said a solution under discussion was for euro zone governments to sign a separate intergovernmental agreement for that purpose, which would also allow them to collect money for the budget from sources other than those the EU budget uses now. (Reporting By Jan Strupczewski; Editing by Catherine Evans)