The European Commission outlined radical measures Wednesday to deal with banks that run into trouble with the key aim of making shareholders and creditors, not taxpayers, foot the bill.
It proposed that supervisors be allowed to suspend dividends, replace managers or force asset sales to spare governments a "terrible dilemma" of having to decide between letting a bank fail _ at the risk of disrupting the entire financial system _ or let taxpayers bail it out.
EU Internal Market Commissioner Michel Barnier proposed a pan-European system that would allow for the orderly winding down of a troubled bank and help deal with banks operating in several countries.
At the height of the credit crisis in 2008, European governments scrambled to coordinate the bailouts of banks such as Netherlands-based Fortis and Belgium's Dexia.
"I call this the most pressing and important reform that we are involved in," Barnier said. "I am very concerned about the risk of another crisis."
Since the collapse of Lehman Brothers in 2008, European governments have spent more than euro5 trillion on supporting banks, according to EU data. Ireland has said the cost of bailing out its banks might reach euro50 billion, pushing its budget deficit up to almost one-third of GDP.
The commission wants to propose specific legislation by the spring, but plans are likely to face stiff opposition from banks and institutional investors.
Finding common ground with the EU's member sates and their banking supervisors will also be difficult.
One key part of Wednesday's plan is the creation of national resolution funds. These would provide the money necessary to allow an orderly winding down of banks.
The commission wants EU governments to introduce bank levies to raise the revenues for their resolution funds. Germany, France, Britain and Sweden are currently working on, or have already implemented, such levies.
However, France and Britain want to use the levies to plug holes in their general budgets, rather than fill a resolution fund for banks.
Another question is whether governments and supervisors would actually be willing to force bond holders to shoulder part of the bill for restructuring or winding down a bank. Critics argue forcing creditors to take so-called haircuts could undermine confidence in the entire financial system.
"EU governments have repeatedly put the interests of creditors over taxpayers, including most recently in the case of the Allied Irish Banks," Sony Kapoor, a former investment banker who now lobbies for financial-sector reform, said in a statement.
"An expansion of the toolkit is good, but experience shows that regulators did not even use the tools they already had."
Any EU legislation will also require close coordination with efforts outside the EU, since many banks operating on the continent are based elsewhere.
Cross-country bank resolution and measures to avoid expensive government bailouts will be key issues at a meeting of the Group of 20 rich and developing nations next month in Seoul, South Korea.
Any proposed EU legislation would have to be passed by EU governments and the European Parliament.