The long-running effort to reform the banking sector in the wake of the global financial crisis continues in the latest federal budget, with the announcement of more measures designed to protect taxpayers and bank customers against the fallout from banks that are “too big to fail.”

In the federal budget, released on Tuesday, the government says it intends to follow through on a commitment made a couple of years ago to protect taxpayers from the damage that could be inflicted by the failure of a large, systemically important bank. To that end, the government intends to adopt a “bail-in” regime that would allow a large bank that’s facing failure to be restructured without calling on the resources of taxpayers, or its depositors.

Legislative amendments will be required to implement the new regime, and this will also have to be followed by rules that fill in many of the details. Officials from Finance, speaking on background, said that these details — such as added capital requirements for systemically-important banks — have yet to be determined. The government does say that the new regime would impose a minimum loss absorbency requirement; that it will be designed protect depositors; and that only long-term, unsecured debt would be subject to conversion into common shares.

The budget notes that the systemically important banks will be given time to move to the new regime, which will follow international principles that have been developed in this area by the Financial Stability Board (FSB), and endorsed by G20 nations. “This transition will allow for a smooth adjustment by affected banks, investors and other market participants,” it says.

Along with the new bail-in regime, the government says that it will also call on systemically-important banks to ensure they are developing so-called “living wills,” which are plans that set out how a major bank would be wound up in the event that the restructuring efforts don’t work as hoped. A Finance official notes that the banks and the regulators are already engaging in this process, but that the government is stepping up its expectations for the big banks in this area.

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