European Commission vice-president Viviane Reding said public confidence in the financial sector had nose-dived after the latest revelations about manipulations by banks of key lending rates, such as the London interbank offered rate, or LIBOR.
The London rate and the related European interbank offered rate (EURIBOR) are benchmarks for over US$500 trillion in global contracts, including loans and mortgages. Benchmarks also serve as the basis for many commodity contracts.
Reding said EU action "was needed to put an end to criminal activity in the banking sector and criminal law can serve as a strong deterrent."
The EU did not propose what specific sanctions rate-rigging would take, saying that would be up to member states. But it said it would require the bloc's 27 nations to criminalize inciting, aiding and abetting the manipulation of the rate benchmarks, as well as attempts at manipulation.
Britain's Barclays bank admitted last month that it had submitted false information to keep the rate low. The bank agreed to pay a $453 million fine.
A number of major banks, including Citigroup and JPMorgan Chase, are also being investigated.
The EU has expressed serious concerns about the impact of false submissions of the interbank lending rates, equating it with insider-dealing and market manipulation.
The commission also said it would examine how to ensure the integrity and transparency of the process used to set the interest rate benchmarks and how to provide adequate oversight.
Michel Barnier, the European commissioner responsible for the internal market, said the EU's executive commission wanted to make sure that "outrages" such as the abuse of the LIBOR system are prevented.
"That is why I have discussed this with the European Parliament and acted quickly to amend our proposals, to ensure that manipulation of benchmarks is clearly illegal and is subject to criminal sanctions in all countries," he said.