By Carmel Crimmins and Steve Slater
DUBLIN/PARIS (Reuters) - In the sort of scene that must infuriate Chancellor Angela Merkel, Irish bankers were taped laughing about a bank bailout deal and then mocking the European Union's paymaster by singing the German national anthem.
Recordings of senior executives in Anglo Irish Bank, the lender at the heart of Ireland's EU-IMF bailout, making light in 2008 of the government's decision to guarantee their liabilities at the height of the crisis underlined on Tuesday why Germany is so wary of creating a European banking union.
Berlin's concern that it will end up on the hook for other countries' debts if such a union is created has held up the project's progress, particularly ahead of federal elections in September, at which Merkel is seeking a third term in office.
But without a banking union, investors are likely to continue to mistrust banks in highly indebted euro zone countries, keeping them frozen out of the interbank lending market and holding up the bloc's economic recovery.
The lack of progress vexed bankers and investors gathered in Paris for the spring meeting of the Institute of International Finance (IIF), the industry's main lobbying group.
"If you want to get the economies growing again - and credit supply is part of that - then it's important the system is stable. At the moment there are still some fairly fundamental debates still going on," Douglas Flint, chairman of both HSBC <HSBA.L>, Europe's largest bank, and the IIF told Reuters.
A summit of EU leaders later this week was meant to be an important "landmark" on the road towards a fully fledged bank union, but after finance ministers failed last week to agree common rules on who should pay when a bank fails, it is unlikely to produce any major breakthrough.
The European Central Bank (ECB) will therefore likely take over supervision of the bloc's top banks next year without a common process for dealing with failing banks and without a single guarantee scheme for bank deposits.
With European finance ministers due to reconvene on Wednesday for more talks on how to deal with collapsing banks, the ECB policymakers called for action.
"Progress towards a genuine Economic and Monetary Union should be confirmed ... starting with clear and predictable rules for bank resolution and with the establishment of a single resolution mechanism, complementing the single supervisory mechanism as the second pillar of the banking union," ECB policymaker Benoit Coeure said at an event in London.
Irish people reacted with anger on Tuesday to the swagger of the Anglo Irish bankers, in tapes published this week, but mistrust of banks is widespread across Europe.
Elderly investors booed Bankia <BKIA.MC> executives at the Spanish lender's shareholder meeting, rejecting assurances that the worst was over for the bailed-out bank.
Investors who hired buses to the meeting in Valencia, eastern Spain, waved placards outside the venue reading "No to financial fraud!" and chanted "Hands up! Bankia is a robbery!"
In Switzerland, meanwhile, the Financial Stability Board, the agency that sets rules for global banks, said it would establish a task force to look at reforming the London interbank offered rate (Libor), at the center of a global manipulation scandal.
Interest-rate rigging, mis-selling financial products and a cavalier attitude to risk before the crisis made bankers the focus of public ire after the crash, prompting European policymakers to curb their bonuses and, in Britain, to consider the threat of jail.
Some 86 percent of respondents in a survey said it would take British banks at least five years to regain their trust, the Chartered Institute for Securities & Investment said.
A key component of restoring trust and persuading investors that Europe's banks are on the mend is to ensure that the next round of stress tests, to be held before the ECB takes over supervision in 2014, are credible.
Unlike the United States, where lenders were given a thorough examination followed by recapitalization in 2009, Europe's banks have faced a series of examinations which have been criticized for being half-hearted, meaning the region is still in crisis mode.
"We are caught halfway between this crisis stress testing - where there's a big drum roll and there's a big number and a need to fill that hole - and the regular supervisor stress testing that's an analytical tool with a range of outcomes," Piers Haben, a senior official at the European Banking Authority, told the IIF meeting in Paris.
""We're a long way from the calm, under the radar supervisory stress testing."
(Additional reporting by Laura Noonan in Paris; Marc Jones in London, Emma Thomasson in Basel, Jesus Aguado in Valencia and Sam Cage in Dublin; Editing by Alexander Smith)