European Union finance ministers approved a plan Thursdayfor dealing with future bank bailouts, forcing bondholders and shareholders to take the hit for bank rescues ahead of taxpayers.
The new framework requires bondholders, shareholders and large depositors with over 100,000 euros to be first to suffer losses when banks fail. Depositors with less than 100,000 euros will be protected. Taxpayer funds would be used only as a last resort.
Shielding small depositors from losses is a top priority in Europe, especially after the public outrage over initial plans to bailout Cypriot banks using money from both large and small depositors.
Commissioner Michel Barnier called the agreement a "balanced compromise" between the 27 finance ministers.
"The EU has made a big step towards putting in place the most comprehensive framework for dealing with bank crises in the world," Barnier said in a statement.
The new plan outlines a hierarchy of who will have to rescue struggling banks, with bondholders taking the first hit. Shareholders will be next, followed by large depositors.
Even within the large depositor category, there is a specific order detailing which depositors will have to kick in money first, with small and medium-sized businesses receiving preferential treatment.
The plans also outline that European banks must contribute toward "resolution funds," which can be drawn upon during a banking crisis.
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"During the financial crisis, there was no single set of tools available to member states to deal with failing banks," said Ireland's finance minister, Michael Noonan, who chaired the talks.
"This agreement will effectively move us from ad hoc 'bail-outs' to structured and clearly defined 'bail-ins'," he said. "In the event of future banking failures taxpayers will be protected."
The framework will now have to be considered by the European Parliament before it is approved. The goal is to have the plans finalized by the end of the year.