European Union finance ministers gathered for a special meeting in Brussels to debate the so-called Basel III regulation that will require banks to increase their capital buffers so they can withstand financial shocks.
"There's a lot of work left before we get there," Swedish finance minister Anders Borg told the TT news agency.
The discussion comes in the midst of concerns about the health of the Spanish banking sector, still reeling from a real estate bubble that burst in 2008, but officials say Madrid's struggles are not on the agenda.
"We feel that it is very important that we have strong banks, and that means strong capital in the banks, so we are looking for a solution today," Borg told AFP on arrival for the talks.
"Either we have strong banks or the taxpayers take the risk, and I prefer to have strong capital in the banks than to take risks with the taxpayers."
Britain, Sweden and others want the freedom to impose tougher capital requirements on their banks than the Basel rules, should they want to do so, but the Franco-German bloc is pushing for all 27 EU states to follow the same line.
France and others fear that allowing one nation to set higher thresholds would spark a "race to the top," as governments would compete to show their banks have the biggest reserves, said a senior EU diplomat.
These nations are also concerned that forcing banks to park too much capital would curb efforts to encourage them to invest in Europe's sickly economy, the diplomat said.
While the European Commission and nations such as France want "maximum harmonization," another EU diplomat said Britain argues that capital rules are a sovereign issue since taxpayers would be affected by any bank failures.
Polish Finance Minister Jacek Rostowski pointed to the "sad example" of Ireland, which was bailed out after its public deficit blew up following a banking crisis.
"A group of countries including Poland, the Czech Republic, Sweden and the UK are very determined to see that banking systems in the future should be kept as healthy as we expect the fiscal side, budgetary side, to be kept," he said
"This crisis is a crisis in which fiscal and banking system crisis feed on each other. It's not enough to deal with one, you need to deal with both at the same time," Rostowski said.
Sweden's finance ministry said last week that governments must have "greater possibilities to take the measures they consider necessary to ensure financial stability at a national level than those provided by the current proposal."
"In countries with a strong banking system, bank lending works better," Borg told TT ahead of Wednesday's negotiations.
"It's in countries with week banks that there are problems. It's better that we come out of this crisis and do something to rectify the underlying problem, namely that banks had too little capital."
The two blocs are also at odds over whether banks should be allowed to count capital from their insurance businesses in order to meet the Basel capital requirements.
"This type of capital is not viable," an EU diplomat said, adding that the Germans "want to cover up the fact they are under capitalized."
The Basel III rules, which governments must start to implement in 2013, require all banks to strengthen their capital reserves by raising total core reserves to 7.0 percent from 2.0 percent at the moment.
The Danish presidency to the EU has proposed a compromise that would allow governments to impose an extra 3.0 percent buffer, with anything above that requiring European Commission permission.
But Britain and Sweden are against letting the commission, the EU's executive arm, making such decisions.
London wants the council of EU governments or the European Systemic Risk Board, a financial oversight body, to have a say instead.