* New law is crucial for bank union to move ahead
* Some uneasy about giving up control over bank rescues
* Failure to reach deal on Wednesday could rattle confidence
By Jan Strupczewski
BRUSSELS, June 24 (Reuters) - European Union finance ministers are under pressure to agree who pays for failing banks after failing to reach a deal last week, with Germany and France at odds on how to distribute the costs.
The law on rescuing and closing banks in the EU is central to the 27-nation bloc's banking union, which aims to prevent future financial crises and get the economy out of recession.
It is also a highly controversial element as it will dictate who decides what happens to a failing bank and who is to pay for it, bringing national sensitivities to the fore.
After talks failed last Friday following almost 20 hours of talks, EU leaders have asked for a deal on the directive by Thursday and talks have been scheduled for Wednesday.
Any slippage could further set back the banking union project, which has been delayed twice because of the complexity of negotiations between EU governments and institutions.
Ever since banking union started to take shape in mid-2012, Germany has been wary, concerned that as the currency union's largest and most powerful economy, it will end up on the hook for other countries' debts if a single, EU-wide system for sorting out problems is put in place.
While there is no immediate deadline for an agreement, the risk of a negative market reaction to another failure has been growing since the U.S. Federal Reserve made clear that it might not be printing any more money by this time next year.
Adding to the pressure are rising peripheral euro zone borrowing costs, which threaten to reignite the sovereign debt crisis, in abeyance since the European Central Bank declared it could buy unlimited amounts of bonds.
"Failure to comply with this agenda would cast serious doubt on the ability of European member states to implement the banking union on time, and would undermine its credibility, with possible adverse impacts on bank funding costs," British bank Barclays said in a research note to clients.
The talks are difficult because the crucial part of the directive describing who pays for rescuing or closing a bank will set a model for all future bank rescues or closures in the EU and become the basis of two other key pieces of legislation.
The first piece - guidelines for the euro zone bailout fund on saving a bank from collapse - will only become legally valid when the directive is agreed with the European Parliament.
The ministers cannot even start negotiating with the parliament unless they agree their own common position first.
The second piece is a law that will go a step further than the directive by setting up a central EU authority to decide if a bank must be closed rather than a network of national authorities as is envisaged under the directive.
This law, called the Single Resolution Mechanism (SRM), is also to set up a central EU fund fed by bank fees that would pay for closing a bank -- a task that until then will fall to national resolution funds, some of which have yet to be set up.
If concrete progress on banking union - originally conceived of as a three-step process involving a single supervisor, a single resolution mechanism and a single bank deposit-guarantee scheme - is put off until after September's German election, the chances are that nothing will happen until mid-2014 or later.
The broader the possibilities of imposing losses on a bank's shareholders, creditors or even big depositors in the directive that will be discussed by EU finance ministers, the less money the resolution fund would have to contribute to close a bank.
This is an important consideration for bailout-weary euro zone governments like Germany.
On Wednesday, the ministers will have to decide if they want the directive to spell out clearly who and in what order should lose money when a bank is rescued or closed, or should they leave some discretion on the issue to the bank's home country.
The more discretion granted to a government in deciding the distribution of costs, the larger the EU bank resolution fund will probably have to be. This threat has made Germany an advocate of spelling out all the rules up front.
Ministers will also have to decide on the mininum size of a bank's liabilities that can be written off when it is rescued, known as the loss absorbing capacity of a bank.
As with the size of the resolution fund, the more power individual governments have to decide who pays for the rescue, the bigger the minimum requirement for own funds and eligible liabilities (MREL) for write-downs.
The directive proposes that losses in a bank would first be borne by shareholders, then by junior bondholders, then by senior creditors and finally, in exceptional cases, by depositors with more than 100,000 euros ($132,000).
Savers with 100,000 euros or less would have their deposits guaranteed and would never lose money.
Britain, Sweden and France worry that opening the possibility of forcing losses on big depositors could cause a bank run or rattle confidence, and want countries to have wide-ranging freedom in deciding whether to take such bold steps.
Germany, however, wants strict norms, in the belief that rules should not vary across the EU because that could put some banks at a competitive disadvantage.
If agreed, the rules would take effect at the start of 2015 with the provisions to impose losses coming as late as 2018.