By Jan Strupczewski and Francesco Guarascio
BRUSSELS (Reuters) - European leaders will promise on Friday to complete the EU's banking union in the future, but will leave it to their finance ministers to work out when, their draft conclusions showed.
Completion of the banking union, which would mean setting up a controversial common deposit insurance scheme, would sharply reduce the possibility of a major banking crisis in the 19 countries sharing the euro and in this way boost market confidence in the euro and demand for the currency.
But the issue is highly sensitive in several euro zone countries and euro zone finance ministers together with their non-euro colleagues from other EU countries have been stuck trying to agree on the deposit guarantee scheme for years.
"We reiterate our full commitment to the completion of the Banking Union and, capitalising on recent discussions, invite (EU finance ministers) to agree, without delay and on a consensual basis, on a stepwise and time-bound work plan on all outstanding elements needed to complete the Banking Union," the draft said.
The main outstanding element is the EU-wide deposit guarantee, because there already is a single bank supervisor and a single resolution mechanism for banks that fail.
But before the common EU deposit protection, called the European Deposit Insurance Scheme (EDIS), is agreed, Germany and some other countries say other problems have to be cleared up.
First of all, banks need to be less in danger of collapsing in the first place, which means reducing their bad loans and exposure to the debt of a single issuer, like the government of the country they operate in, so that they would not go under if the sovereign they are most exposed to cannot redeem its bonds.
While the ratio of bad loans has been falling steadily in the euro zone, it is still too high in some countries for Berlin's liking.
Crucially, limits on the amount of bonds of a single sovereign that a bank is to hold, are hard to swallow for Italy, which finances a lot of its borrowing in local banks. Some other southern countries share Italy's objections.
Euro zone officials said no progress on any of the topics is likely before German parliamentary elections in late September.
But even with a new German government in place, progress will be hard to achieve before France holds its election in May 2022, which is when serious talks might begin.