The EU unveiled long-awaited plans to rein in the "too-big-to-fail" banks in what the commission said was the final step towards preventing a repetition of the 2008 banking crisis.
The reforms, affecting about 30 of the biggest banks, would stop them trading on their own account and force them to hive off some of their riskiest activities.
But they are watered down from a 2012 EU report that recommended making all banks completely ring-fence their day-to-day retail operations from the high-risk trading widely blamed for setting off the 2008 global crash.
France and Germany have warned against going too far with the reforms, saying national laws may be better and that too much meddling will hurt the fragile economic recovery.
EU Financial Services commissioner Michel Barnier, who unveiled the plans in Brussels, said they deal with the small number of very large banks which otherwise might still be "too-big-to-fail, too-costly-to save, too-complex-to-resolve."
"The proposed measures will further strengthen financial stability and ensure taxpayers don't end up paying for the mistakes of banks," Mr Barnier said in a statement.
He said that today’s proposals were "the final cogs in the wheel" to complete the regulatory overhaul of the European banking system.
"The proposals are carefully calibrated to ensure a delicate balance between financial stability and creating the right conditions for lending to the real economy, particularly important for competitiveness and growth," the Commissioner added.
The proposals follow up on the 2012 Liikanen Report into separating banks' riskier activities from their traditional role in ordinary, low-margin but largely safe retail banking.
The banking crisis that started with the collapse of Lehman Brothers and the ensuing euro zone debt crisis has prompted the European Union to adopt a whole series of banking sector reforms to tighten overall regulation and minimise excessive risk taking.
The EU's proposals would stop the biggest banks from engaging in "proprietary trading" - trading with their own money for their own gain, as opposed for their clients.
They would also give EU banking supervisors the power to make big banks hive off high-risk activities - such as complex derivatives of the kind that led the banking sector into crisis in the first place - if they were seen as compromising financial stability.
The proposals are unlikely to come into effect any time soon.
They must first go to the European parliament for discussion, but with elections in May and then a change-around of all the top positions in the EU later this year, it is unlikely they will be taken up until late 2014 or early 2015.