EU eyes new regime to cope with stricken banks The proposal will suggest closer coordination between countries and powers to force losses on the bondholders of failing banks to prevent a repeat of the chaos following the 2008 collapse of U.S. investment bank Lehman Brothers. If it wins the backing of EU countries and the European parliament, the law would represent a step in the direction of the banking union championed by ECB President Mario Draghi. The legislation is unlikely, however, to take effect before 2014, too late for Spain, which could be forced to seek a bailout if it cannot refinance its troubled lenders. The Commission's 156-page draft will suggest giving supervisors powers to "bail in" or force losses onto bondholders of a bank so that taxpayers are kept off the hook. The EU executive hopes that tighter links between wind-down schemes across the European Union will be, said one official, the "embryo" for a single resolution fund to close or salvage parts of a flagging bank, an important part of Draghi's vision. The law would introduce an insolvency regime for banks in the European Union. It would instruct countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees. Draghi's three-pillar plan for a banking union consists of: central monitoring of banks; a fund to wind-down big lenders: and a pan-European deposit guarantee. Although this would apply chiefly to the euro zone, it would affect other EU countries. But there are many hurdles to ahead. Germany has balked at signing a single European scheme that could see it shoulder the costs of a bank collapse in another country. Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its economy. Other proposals for a common response to a banking crisis have hit obstacles. In 2010, the Commission published a framework for deposit guarantee schemes, but EU member states demanded a cut in the size of the funds kept to cover any sudden cash call by savers. That led to an impasse with the European Parliament. "France, Italy, Britain and Germany were not in favor of creating national funds big enough even to deal with a medium-sized crash," said Peter Simon, a German lawmaker who led negotiations on behalf of the parliament with countries to broker a compromise. "We suggested that such funds have the equivalent of 1.5 percent of covered deposits and they wanted 0.5 percent," he said. This kind of protection ... would be fake. Wednesday's proposal is expected to suggest the creation of national funds, equivalent in size to 1 percent of deposits. That money would cover both the wind-down of a bank and any emergency payout to worried savers. This would mean that backstop funds in the euro zone should, after ten years, have gathered roughly 70 billion euros in cash as well as country pledges to pay in, according to estimates by the European Commission. That figure rises to 100 billion euros for the 27 countries in the European Union. (Reporting By John O'Donnell. Editing By Sebastian Moffett and Leslie Gevirtz)