VILNIUS, Sept 14: EU finance ministers discussed on Saturday how to close down failing banks before they damage the wider economy, a divisive issue for those wary of giving Brussels more power.

Sharp differences emerged on Friday at informal talks in Vilnius over a planned Banking Union, the new regulatory framework meant to ensure that the taxpayer no longer foots the bill for bailing out over-extended banks.

The idea was accepted initially as essential to head off future crises, but several member states, including Germany and Britain, are now uneasy about how it will be implemented in practice.

“So far there have been cannon shots going back and forth,” Dutch Finance Minister Jeroen Dijsselbloem said as he went into Saturday's meeting.

Dijsselbloem, who is also head of the group of 17 eurozone finance ministers, added: “We will have an interesting debate over the next few months ... we should have these discussions rather quickly and finish by November, December.”

He insisted that the Banking Union plan was not being watered down, noting that much progress had been made, with the first step, the Single Supervisory Mechanism (SSM), approved Thursday by the European Parliament.The SSM is tasked with supervision of the banking sector in the eurozone under the direction of the European Central Bank (ECB), aiming to ensure that small, localised problems do not grow into major ones affecting all banks.

The SSM will be run by the European Central Bank but the sticking point now is the next step, a Single Resolution Mechanism (SRM) to wind down failed lenders.

The current plan is for the SRM to operate under the European Commission, the EU's executive arm, but that would mean a huge expansion of its powers.

EU Financial Markets Commissioner Michel Barnier repeated that the Commission was not looking to take on the job but it had to take the lead given the need to stabilise the banking system and get it lending again to business.

“If someone comes up with a better idea, I am ready to work on it,” he said.

German Finance Minister Wolfgang Schaeuble said Berlin wanted a banking union “fast but we want it on a solid basis with reasonable solutions.

“The way proposed by the Commission... is a bumpy one,” Schaeuble said.

ECB vice president Vitor Constancio said that while the SRM did not have to be in place for the SSM to function, “it is something we see as absolutely necessary” in due course and would be crucial for banks operating in more than one country.

Lithuanian Finance Minister Rimantas Sadzius, who chaired the talks as Vilnius holds the current EU rotating presidency, said ministers had also discussed how capital markets could help fund business.

The future of the financial markets “is wider than Banking Union alone,” he said, noting that in Europe companies rely much more on the banks for credit than in the US and this should be changed.

Eurozone finance ministers met separately on Friday as the single currency bloc finally emerges from a damaging recession and warned that there was no room for complacency.

Painful reforms had to be pushed through even if the immediate crisis was offer and there could be no backsliding, officials said.

The bailed-out countries especially must stick to their targets, with no compromise, even though it is expected some, such as Greece, need further help.

“The economic outlook is improving,” Dijsselbloem said but unemployment stuck at 12 per cent “is still too high”... We need to carry on with all our policies with strong resolve.” –AFP