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European Union governments want to shift the cost of rescuing troubled banks from taxpayers to the banks' creditors — including the holders of large deposits— as part the region's plan to shore up its shaky financial system.
Finance ministers from the 27-country bloc meeting in Brussels on Tuesday sought to hammer out the new rules on how to fund bank rescues but their discussions showed that they were still far apart from agreeing the technicalities underpinning the project to build a Europe-wide banking union. That plan is key to strengthening the financial sector and avoid a repeat of the crisis.
"This is at the moment the biggest project for Europe," said Dutch Finance Minister Jeroen Dijsselbloem.
"It's absolutely important to get it right."
The bloc should move swiftly and get all elements of the banking union running by 2015, well before the initial deadline of 2018, added Dijsselbloem, who also chairs the meetings of the 17-country eurozone's finance ministers.
Tuesday's meeting focused on establishing a hierarchy of which bank creditors have to take losses in case the bank needs rescuing — to be involved in a "bail-in". The ministers mostly agreed that banks' shareholders and capital must take the first hit. After that, the pecking order becomes less clear, with junior and senior bondholders and, ultimately, all the banks' clients on the line.
Most ministers said holders of deposits of over 100,000 euros ($130,000) — the EU's deposit insurance ceiling — could be forced to suffer losses as a last resort, said Irish Finance Minister Michael Noonan. Deposits below 100,000 euros, in turn, are "sacrosanct" and will always be protected, he added.
While making large depositors take a hit would help limit the losses borne by other classes of creditors, some ministers expressed worries it could jeopardize financial stability and scare off savers.
The issue has become important since the bailout for Cyprus, agreed on in March, inflicted losses on deposits over 100,000 euros at the country's two biggest banks. An initial proposal was to have all deposits suffer losses. The proposal, although quickly rejected, raised concerns and confusion across Europe on how bank creditors would be treated in future bank rescues.
The European Central Bank and EU officials have since called for the establishment of clear rules on the matter so that investors can gauge their risk beforehand.
Dijsselbloem, Britain's George Osborne and others also argued that — in addition to existing capital requirements — bigger banks should be forced to hold a certain amount of investments that can be used to pay for potential rescue operations.
The ECB, which is set to become the supervisor of the bloc's banks, said it will push hard for a swift agreement on all elements of the bloc's banking union, including a central authority with the power to rescue or unwind ailing banks.
The establishment of the banking union will get credit flowing again to some of the eurozone's troubled nations, helping to "kickstart growth and employment," said ECB executive board member Joerg Asmussen.
But Germany, Europe's biggest economy, was at odds with Asmussen's comments. It argues that the creation of some parts of the banking union will require changes to the EU's treaties, which is a cumbersome and time-consuming procedure.
The finance ministers also sought to push ahead on two fronts in the fight against tax evasion, but could only secure agreement on one initiative due to a fight-back from two of its members.
Austria and Luxembourg, both of which are renowned for their culture of banking secrecy, dodged a long-delayed initiative to automatically exchange banking information between all EU countries so that interest income can be properly taxed.
The EU's Tax Commissioner Algirdas Semeta expressed "great disappointment," but said the issue will now be taken up by a summit of the EU's 27 heads of state and government next week.
"Let's hope that what our leaders agree at the summit next week is more like a giant leap," he said.
The two holdouts defended their decision, saying it was necessary to agree on an international level playing field rather than just an EU agreement.
The finance ministers, however, agreed on one step to fight tax evasion that Luxembourg and Austria had also held up in the past.
They agreed to direct the European Commission, the EU's executive branch, to begin talks on an automatic exchange of banking information with five small countries that aren't EU members — Switzerland, Andorra, San Marino, Monaco and Lichtenstein. The deal would ensure EU citizens can no longer hide capital gains made there from tax authorities at home.
"I hope all these countries will be ready to start negotiations very quickly and that these negotiations won't take long," Semeta said.
An agreement was also reached agreement on an amended budget for 2013.
The Commission said there was a shortfall of about 11 billion euros in its 130 billion euro budget, resulting mainly from unpaid bills from last year. A majority of ministers decided to propose an amendment to the budget to cover 7.3 billion euros, Noonan said.
EU Budget Commissioner Janusz Lewandowski, however, insisted that member states will have to fund the remaining 4 billion euros later this year.
Britain led the minority front opposing the amended budget altogether. Osborne said it was impossible to explain to citizens why the nation states are pushing through budget cuts and other austerity measures while the EU is getting increases.
The decision to amend the budget is significant since the European Parliament had made it a precondition for reaching agreement on the EU's long-term 1-trillion-euro budget, which covers the years 2014 through 2020.
Don Melvin in Brussels contributed reporting.
Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz