An Italian government plan to compensate some retail bondholders who lost money after the restructuring of four small banks may set a precedent for how the country handles future banking crises. Moreover, it underscores the diverging priorities of the European Union and Italian decision-makers when it comes to the country’s banking system.

Italy restructured four small banks in late November, implementing a 3.6 billion euro ($4 billion) plan that imposed losses on 130,000 shareholders and 10,500 junior bondholders. Italy’s small banks have long been struggling, but the government chose to act before stricter European Union rules regarding so-called “bail-ins” come into effect in January. The primary aim of a bail-in is to allow European governments to stabilize a failing bank so that its essential services can continue, without the need for a bailout by public funds. The European Union introduced these rules in 2013, with the deadline of 2016 for implementation, in order to level the playing field for banks across the bloc, prevent moral hazard and minimize the use of taxpayer money for bailing out banks. Under the rules, banks with a capital shortfall will have to take over shareholders’ and subordinated debtholders’ contributions before being allowed to benefit from state-funded recapitalizations or asset protection measures.

Formally, the Italian government is preparing to create a 100-million-euro fund, with both state and banking sector contributions, to compensate some bondholders of the small four restructured banks because they potentially sold subordinated bonds to people whose risk profile was not compatible with the bonds. The four banks’ 10,500 retail clients held about 340 million euros’ worth of subordinated bonds. In reality, however, the government began considering the plan primarily due to public outrage over the losses and the suicide of a pensioner who lost his life savings in the banks, as well as accusations of favoritism shown to the specific banks involved.

A 100-million-euro compensation fund represents a minor expenditure, but it could set a precedent for future compensation. Italy’s banking system is riddled with bad debts. Of the country’s total loans, 17-18 percent are non-performing. Should any larger banks fail or come close to failure, Italy will be bound under European rules to first get shareholders and subordinated debtholders to take losses. As in the case of the restructuring of the small banks, there would likely be strong domestic pressure for the government to provide at least some compensation mechanism — a costly endeavor. Italy is already constrained financially, with the EU warning in November that the country is at risk of violating the bloc’s spending rules.

At the same time, the European Commission has expressed its support for the Italian government’s efforts to compensate savers over the potential irregular sales of bonds. However, the devil will be in the details, and should larger Italian banks require bail-ins, the government will come under pressure by the local population to provide blanket compensation, rather than case-by-case compensation for irregular sales. This pressure could set Italy on the course for a legal battle with the EU over what kind of compensation scheme would comply with European regulations on state aid.

While it is Italy’s priority to both stabilize its banking system and placate constituents whose money is at risk, the European Union’s aim is to ensure the system’s stability as a whole and fair competition among banks across the EU. Even if the European Union formally approves Italy’s plans for a 100-million-euro compensation fund, any future problems in larger banks could contribute to a crisis between Italy and the EU over banking rules.