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Key EU banking reform laws approved

European lawmakers on Tuesday approved key laws reforming the euro zone's banking sector, completing a "banking union" which will protect taxpayers from having to pay for costly bank bailouts in future.

"This new legislation stipulates what has to happen when a bank needs to be resolved, that (it) is wound down in an orderly fashion with a minimum impact on taxpayers and financial stability," Gunnar Hökmark, a Swedish member of European Parliament (MEP) said in the Strasbourg plenary session.

European Central Bank and Euro Symbol in Frankfurt, Germany.
Getty Images
European Central Bank and Euro Symbol in Frankfurt, Germany.

The rules agreed at the European Parliament's final session before European elections in May, are the culmination of a long process started after the 2009 financial crisis which saw banks across Europe require bailouts, often at the expense of taxpayers.

A deposit guarantee scheme, in which depositors will be guaranteed coverage of 100,000 euros in case of bankruptcy backed by funds to be collected in advance from the banking sector, was also given the green light.

Read MoreDraghi hails 'great progress' after banking union deal

"No one shall in the future presume that taxpayers will help any bank," Hökmark said.

The rules

The new laws introduce a "bail-in" which will see shareholders and creditors pay for banks' mistakes instead of the taxpayer.

Under the so-called Single Resolution Mechanism (SRM), the European Central Bank (ECB), European Commission and a new Single Resolution Board will assess a bank's health and decide what action to take to resolve a troubled institution's problems. This could involve insolvency, or using money from a central fund to help the bank.

The fund will be created from contributions from all the participating banks under the scheme and is aiming to reach 55 billion euros in eight years.

"The banking union really is the cornerstone because everybody has understood the stability or instability of the euro zone relates to the stability of the whole of the single market and we are all responsible for that," Michel Barnier, the EU's market chief said in Parliament.

Read MoreEurope's new banking union: Why you should care

"We need to make sure the financial sector is there to serve the real economy rather than serve themselves which we have seen too much in the last 30 years."

Banking union 'failure'

The SRM will come in to effect from January 1 2015, while the process for bail-in and resolution for failed banks will begin in 2016.

Members of the European Parliament, the European Commission and national finance ministers locked horns in a marathon 16-hour meeting last month to nail down the details of this bill. While a compromise was reached, some lawmakers still thought the legislation was limited.

Portuguese Communist MEP Marisa Matias called the banking union the best example of "failure to keep promises" and dubbed the ECB "the most powerful undemocratic institution in the world".

Read MoreEurope banks get downgrade warning amid 'bail-in' concerns

British UKIP MEP Roger Helmer claimed the proposals were "inadequate" and slammed the euro as "the underlying cancer".

Coordinating cross border efforts on monitoring the banking sector will be difficult and the success of the latest raft of measures depends on whether authorities across the European Union work together, according to one lawyer.

"Whilst the takeover of the bank's control and the bank's resolution are only seen as last resorts, by setting out common rules the aim is to facilitate cross-border resolutions. But how well this works in practice will be down to how the European and national supervisors and resolution authorities across the EU work together," David Ereira, partner at Linklaters, said in an emailed statement.

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