Under the new agreement, which still must be approved by the European Parliament, a hierarchy will be established to determine who should pay first when a bank is in trouble. First, shareholders and bond owners will be asked to carry losses. If more money is needed, depositors of more than 100,000 euros (about $130,000) will be asked to step in. Government bailouts should become possible only in extreme cases, such as when contagion is a serious concern, and only after bank investors and depositors have carried a loss of at least 8 percent of the bank's total liabilities. To further help struggling banks, other parts of the agreement demand that each country set up a national resolution fund or a different financing mechanism financed through levies on banks. Within 10 years, these funds should cover 0.8 percent of the insured deposits.

With this agreement, EU members hope to address public anger over government bailouts of the financial sector and reduce the likelihood of struggling banks leading to a sovereign bailout, as was the case in Ireland. They also want to send a message that the conditions of the Cypriot bailout, which in its original form would have affected depositors of less than 100,000 euros, will not be the norm for banking bailouts in the European Union.

However, it is highly unlikely that governments or the real economy would not be seriously affected in another banking crisis. In Europe, more than in the United States, bank lending is the main source of credit for companies — according to the European Banking Federation, about 75 percent of European corporate financing comes from banks, compared to 30 percent in the United States — and banks are important purchasers of government debt. Therefore, if a bank runs into trouble, commercial and government borrowing costs would likely rise substantially, spreading what started as a banking crisis throughout the whole economy.

While Brussels stands by its promise to protect depositors of less than 100,000 euros, the inclusion of deposits in rescues risks destabilizing banks in countries that already have struggling financial sectors. Spain, which received a bank bailout in 2012, was one of the most vocal advocates for the protection of all deposits. The idea to protect only small depositors was not what Madrid had in mind. Capital flight under the new agreement will probably skyrocket at the slightest sign of instability, since large depositors could be forced to pitch in. The Cypriot bailout set a precedent for the inclusion of depositors in the restructuring of banks. As a consequence of this so-called bail in, Cyprus plunged into a deep recession and had to implement capital controls. Other countries will likely have to take similar measures after depositors suffer losses.

While the agreement moves the European Union closer to the creation of a European banking union, it is questionable whether such a union would actually have a meaningful stabilizing effect on the European banking sector overall, especially considering how long it takes to implement each step and the burden put on financial sectors in individual countries. The first element of the banking union, at least for the eurozone, will be put in place in late 2014, when the European Central Bank takes over as supervisor for eurozone banks. During the week of July 1, the European Commission will present plans for the creation of a central bank resolution body, another step toward the banking union. Considering the differing national interests, it will be some time before EU members come to an agreement on a central authority with the power to decide when a bank should be restructured.

In June 2012, the European Union promised to break the link between national governments and bank bailouts. Last week, the EU finance ministers agreed that the European bailout fund would be allowed to bail out banks directly, again to limit the burden on governments. Of the fund's 500-billion-euro capacity, 60 billion euros will be available for bank bailouts but only after the governments and private sector have heavily contributed to the effort. If additional money is needed, central governments will be in charge of it.

EU finance ministers hope to address the technical aspects of this agreement by the end of the year, but the rules are not supposed to take effect until 2018. In the meantime, there is considerable uncertainty about how banking crises will be dealt with. Considering the precedent set by Cyprus, a combination of government bailouts and inclusion of depositors is likely, especially in countries where governments already are struggling financially.