ANY PLANS to set up “bad banks” in the European Union must not leave taxpayers overexposed to more losses, said internal market commissioner Charlie McCreevy.

Banks have dramatically curbed lending to each other and to customers, fearing that more “toxic” assets will have to be written down.

“Removing the dead weight of underperforming assets from banks’ balance sheets is essential,” Mr McCreevy told members of the European Parliament’s economic affairs committee.

“The commission has prepared a paper . . . on how best to go about reducing the burden of these assets. The most difficult issue is how properly to price complex assets that have tumbled in value despite being highly rated.

“Too high a valuation and the taxpayer could end up footing the bill. Already it is increasingly difficult to explain to taxpayers why more money must be given to the banks,” Mr McCreevy said.

The European Central Bank said on Monday it was working on guidelines with the European Commission on ways for EU governments to help banks stuck with problem loans. The guidelines will canvass solutions including splitting off troubled real estate and mortgage debts from banks’ balance sheets to create so-called “bad banks”, or other state-backed safety nets.

“Whatever schemes are drawn up, they should be structured in such a way that the taxpayer is not overexposed to the risk of further losses and that the state can benefit from any upswing in the value of the assets,” Mr McCreevy said.

The United States is widely expected to adopt some form of bad-bank approach in the coming weeks, but how to price toxic assets remains a contentious issue.