The European Commission unveiled its long-awaited plan for a European bank resolution agency yesterday, immediately attracting the ire of Germany, which questioned its legality.

The so-called Single Resolution Mechanism will give the European Commission the power to decide when and how to shut banks, although representatives from national resolution authorities will sit on its board. The agency, which will be manned by 300 staff, will be eventually backed by a fund of up to €70 billion, with banks from each country contributing to the fund relative to their risk profile. Announcing the proposal in Brussels yesterday, Commissioner Michel Barnier said it was "only natural" that the funds would be pooled. "This is a European proposal ... I think it's only natural to propose the mutualisation of funds. "

Germany – traditionally wary of debt mutualisation, and in favour of a less-centralised approach to the resolution of banks – reiterated its opposition to the plan yesterday, dismissing the European Commission’s proposals as a “competence hijack” that is illegal under EU law.

Berlin officials took issue with many aspects of the proposals, in particular a plan to allow the commission levy EU banks directly to generate revenue for its bank resolution fund.

“This in practice would be an EU tax and that is a very tricky, constitutional problem,” said a German official.

Berlin officials said they were interested in quick agreement on bank resolution – the latest pillar to be agreed in Europe’s so-called banking union – but would only agree to a “legally sound system”. Germany is wary of Brussels assuming responsibility for an area in which it believes it has no legal competence. Until the competence can be transferred by treaty change, Berlin proposed allowing a network of national bank resolution agencies to come on stream.

“We are of the opinion that (this) goes beyond the competences of the commission,” said government spokesman Steffen Seibert.

A spokesperson for the finance ministry denied that Berlin was on a go-slow for domestic reasons, such as the upcoming domestic election.

Commissioner Barnier said yesterday that he had discussed the proposals with Wolfgang Schauble and other finance ministers, and would approach the forthcoming negotiations on the proposal in a spirit of compromise. The Commission's proposals need to be agreed by member states and backed by the European Parliament, with the Commission keen to get agreement before the current Commission comes to an end next year.

The Commission was not ruling out future treaty change, Commissioner Barnier said, though he stressed that Europe had “an immediate responsibility” to address the issue of problem banks. “We can’t await such a change to solve our problems,” he said, announcing the proposals in Brussels.

While Commissioner Barnier is keen to have the single resolution mechanism in place by 2015, the new banking resolution rules which the agency will be tasked to implement may not be in place until 2018. These set out rules on which categories of private creditors would be hit in the event of a bank wind-down. Yesterday, the European Commission published revised state aid rules, which will apply in the interim period, and will shift the burden onto shareholders and junior bondholders ahead of taxpayers, though they will have no power over senior bondholders. The change in state aid rules also introduces caps on executive pay at state bailed-out lenders, though this will only apply to banks that receive state aid after August 1st.

Commissioner Barnier said that it was impossible to rule out the use of public money in future bail-outs, though any use of taxpayer money would have to be agreed by the Minister for Finance of the country concerned.