





That marks a departure from a commitment by euro-zone leaders, who in June vowed to cut the "vicious circle" linking a government's finances to the health of its banks. Expensive bank rescues had already pushed Ireland into a full-blown bailout and risked doing the same to much-larger Spain.

Leaders said they would set up new euro-zone wide surveillance of banks, in which the European Central Bank, equipped with new powers, would spot lenders' weaknesses earlier. Once that was in place, the bloc's bailout fund, the European Stability Mechanism, would be able to directly recapitalize failing banks.

That would mean financially troubled governments wouldn't have to bankrupt themselves by borrowing billions of euros on behalf of their banks; instead, the ESM would become a direct shareholder in rescued institutions, spreading the risks to all euro members.

But since June, some of the euro zone's richest members, including Germany, as well as the Netherlands and Finland, have gotten cold feet about taking on responsibility for their weaker neighbors' banks—especially for so-called legacy assets, or potentially problematic loans stemming from before the ECB takes over bank supervision next year.

"We don't like the idea that we changed the rules of the game in the middle of the game," Finnish Prime Minister Jyrki Katainen said Wednesday, adding that he was "not that enthusiastic" about allowing direct recapitalizations for banks still struggling with legacy assets.

How to deal with those assets, which include mortgages or other loans, was at the center of discussions in Brussels. The finance-ministry officials sought to set out some of the key parameters for bank rescues as the currency union transitions to the new supervisory system.

There was near-consensus that national governments would remain responsible for ensuring that banks have enough capital to fulfill new international requirements—a Core Tier 1 ratio of capital to risk-weighted assets of 4.5%—according to two officials. If necessary, that capital level would be achieved by forcing losses on private investors.

"Investors and the owners of the banks must be in the first row of responsibility for banking trouble," said Finland's Mr. Katainen. "This should be a normal rule, and only in rare exceptional cases should public money be used."

But it would fall to government to raise the remaining money, these officials said. One official said keeping national governments responsible for the 4.5% capital ratio was necessary to persuade parliaments in rich countries to support direct recapitalizations.

Disagreement remains over how to deal with capital needs that go beyond those minimum requirements. A group of countries mostly from Europe's south want the ESM to take over at that point, the officials said. That is opposed by the richer northern states, which want the banks' home government to keep at least some responsibility.

Finance-ministry officials are now discussing whether the home government should retain a stake in additional recapitalizations. Such national stakes could absorb the first round of losses on capital investments and protect the ESM and other euro countries. Discussions on this are still in the early stages, with proposals for national governments to put up from 5% to 30% of the additional needs, the officials said.

Weaker states oppose a high level of national involvement, warning that "if there is such engagement, we would never cut the link between banks and the sovereigns," one of the officials said.

A further wrinkle in the rescue plan was revealed in new research from ESM staff that the fund's managing director, Klaus Regling, presented to finance-ministry officials. Mr. Regling said that because direct investments in banks are riskier than the traditional loans to governments, they could deplete the ESM's €500 billion ($665 billion) lending capacity faster.

With little or no national loss absorption, a €60 billion direct bank recapitalization by the fund would use up the same as €180 billion in loans to a government, said one official, citing an example given in the meeting. However, if the government retains some responsibility, that could take that amount down to €90 billion, the official said.

Another option presented by Mr. Regling was to create a subsidiary for the ESM that would take responsibility for direct bank recapitalizations. But that would require additional financial commitments from euro-zone states and was therefore opposed by many governments, the official said.

An ESM spokesman declined to comment on the discussions.

Finance ministers are expected to further discuss direct bank recapitalizations at their meeting on Jan. 21, the two officials said. Leaders have promised to have the mechanics of such bank rescues worked out by the end of June, although they are unlikely to become operational before March 2014, when the ECB will take over banking supervision.

Jürgen Michels, euro-zone economist at Citi Investment Research, warned that the system sketched out by euro-zone officials, which already falls short of the June deal, may still be difficult to get through the German parliament ahead of general elections in September.

"It looks, given the discussions that we have [in the Bundestag], still too generous," he said.

Write to Gabriele Steinhauser at and Matina Stevis at