By Robin Emmott and John O'Donnell
LUXEMBOURG (Reuters) - The European Union sought on Friday to forge rules to force losses on large savers of failed banks, a taboo that was broken in this year's bailout for Cyprus.
Finance ministers in Luxembourg are trying to resolve one of the most difficult questions posed by Europe's banking crisis - how to shut failed banks without sowing panic or burdening taxpayers.
The talks follow Cyprus's March financial rescue in which it had to close down one of its banks, impose losses on savers and introduce capital controls to stop a bank run.
Although some politicians have tried to portray Cyprus as a one-off, it could mark a dramatic change in how Europe deals with troubled banks, to spare taxpayers who have been on the hook for previous bailouts.
Some countries have grave reservations about taking such an approach and want the freedom to soften any such EU-wide rules.
"The fact that the euro zone countries are trying to push a solution is very dangerous for the rest of us," Sweden's Finance Minister Anders Borg told reporters.
The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis and - in the case of Ireland - almost bankrupting the country.
But countries are divided over how strict the new rules should be, with some worried that imposing losses on depositors could prompt a bank run while others argue the rules of the game must be made clear from the start.
While there is no immediate deadline for a deal, indecision could hurt confidence in the ability of Europe's politicians to repair the financial system, encourage banks to lend again and help the continent emerge from its economic stagnation.
"Midsummer is the longest day of the year so we have plenty of time," said Olli Rehn, the European Commission's top economics official, referring to the northern hemisphere's June 21 summer solstice.
A 300-page draft EU law that forms the basis of discussions recommends a pecking order in which first bank shareholders would take losses, then bondholders and finally depositors with more than 100,000 euros ($132,000) in their accounts.
EU countries would be required to follow these rules when closing banks.
The regime to impose losses on savers, whether wealthier individuals or companies, could be made stricter within the euro zone, in particular for banks seeking help from the single currency's rescue fund.
'NOTHING IS INSURMOUNTABLE'
A central element to ensure the euro zone's long-term survival is a system to supervise, control and support its banks, known as banking union.
Although not part of the same project, common rules in the wider European Union are considered a stepping stone towards the euro zone's banking union.
Agreeing EU-wide norms would address Germany's demand that European rules on closing banks be in place before the 17-nation euro zone's bailout fund can help banks in trouble.
Euro zone finance ministers agreed late on Thursday to set aside 60 billion euros to help banks via the fund, the European Stability Mechanism, but with tough conditions.
If agreed, the rules would take effect at the start of 2015 with the provisions to impose losses coming as late as 2018.
Still, the idea divides countries with big banking sectors which have the most at stake in any financial crisis.
Sweden, Britain and France say countries should have the final word in deciding how to close banks and not be tightly bound by any new EU rules.
But Germany, the Netherlands and Austria want regulations that will be applied in the same way across all 27 countries in the European Union. They fear that granting too much national leeway would undermine the law.
While Sweden is adamant it must have as much control as possible over how it deals with its banks, France's Finance Minister Pierre Moscovici signaled Paris is open to compromise.
"France wants flexibility but it is willing to agree to some limits," Moscovici said. "Nothing is insurmountable."
For the policy draft on direct bank recapitalization, see http://www.eurozone.europa.eu/media/436873/20130621-ESM-direct-recaps-main-features.pdf.
(Additional reporting by Martin Santa, Ethan Bilby; writing by John O'Donnell and Robin Emmott; Editing by Stephen Nisbet)