European Union finance ministers tackled bank sector reform on Friday, aiming to build on a eurozone deal to inject capital directly into failing lenders to prevent wider damage to the economy.
On Thursday, the 17 eurozone finance ministers agreed on how the single currency's rescue fund, the European Stability Mechanism, could help the banks without adding to the already big debt burden on member states.
The next step is to decide how to close down banks when that is the best solution, with the two facets combined in a Banking Recovery and Resolution Directive.
"We have a fair chance of concluding the work, it is very important in maintaining momentum on the banking union," EU Economic Affairs Commissioner Olli Rehn said on Friday.
"I trust everyone will have a constructive approach on (the BRRD) which ensures that EU taxpayers money is safeguarded and that we have a resilient banking sector in Europe," Rehn said.
Negotiations on the resolution mechanism look like being difficult as it goes to the heart of who has ultimate control over a country's banks.
Some states, for example Britain among the non-eurozone countries, are notably cautious on ceding more authority to Brussels given its jealously guarded financial centre in the City of London.
"We have made significant progress in narrowing the ground (but) ... there are still some significant divergences of opinion," Irish Finance Minister Michael Noonan said as he went into the talks.
"Flexibility is the biggest issue, national flexibility," Noonan said, highlighting the issue of which organisation would handle a bank closure -- the EU or national authorities.
Another key problem is who foots the bill, with bank creditors, including large depositors, now ranked to be 'bailed-in' and forced to make a contribution.
Some countries fear that a bail-in could so weaken a creditor that it has an unintended knock-on effect on other companies, proving counter-productive in the end.
Ministers and analysts welcomed Thursday's eurozone ESM deal as a major step towards "banking union," the new EU regulatory framework meant to contain any bank collapse.
Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast, said that despite some caveats, it was "good news."
-- Diluting the link between banks and governments --
"The essence of this measure is to dilute the link between banks and governments which is positive," Diron said.
"The restructuring of the banking system has been delayed for too long which is one of the reasons why the eurozone cannot grow out this recession," she added.
Up to now, the taxpayer has paid for most of the state and bank bailouts but this has stoked growing unease and only added to debt levels.
To address this problem, the EU, the European Central Bank and the International Monetary Fund in March agreed a Cyprus rescue which 'bailed-in' larger depositors in its two biggest banks to pay for their restructuring.
That move shocked savers who had felt they were safe in light of the EU's supposedly blanket guarantee of deposits up to 100,000 euros.
The EU initially set up the 500-billion-euro ($665-billion) ESM to bail out member states. But last June, when Spain's banks looked near to collapse, Brussels extended its scope to allow direct aid for struggling lenders.
Under Thursday's accord, the ESM will be allowed to inject up to 60 billion euros into lenders needing help but the figure can be reviewed later if needed.
The member state involved will also have to ensure that the bank seeking aid has a minimum capital buffer of 4.5 percent of risks carried, and make up the difference if not, and then must make another contribution in due course.
Bank creditors, including larger depositors, will be 'bailed-in,' as in Cyprus.
The ESM bank recapitalisation role is tied to the Single Supervisory Mechanism (SSM) agreed last year which centralises regulatory oversight of the eurozone's largest lenders under the ECB.
The SSM is meant ultimately to be backed up by a Single Resolution Mechanism for the eurozone and those countries wanting to work with it, and then a deposit guarantee system to reassure nervous investors that their money is safe.