European Union (EU) finance ministers have agreed a deal granting the European Central Bank (ECB) new powers to supervise euro zone banks.
The deal, clinched on Thursday, is the first step in a new phase of closer integration to help underpin the euro, the currency used in 17 EU member states.
The ministers from the 27-member bloc held talks for more than 14 hours, ending months of tortuous negotiations and paving the way for the ECB to directly police the euro zone's biggest banks and intervene in smaller banks at the first sign of trouble.
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"We have a deal," said an EU official, sending the euro to a session high in Tokyo of 1.3080 against the US dollar.
The plan sets in motion one of the biggest overhauls of any European banking system since the financial crisis began in mid-2007 with the near collapse of German lender IKB.
The onus is now on EU leaders, who meet in Brussels on Thursday and Friday, to give their full political backing.
Wolfgang Schaeuble, Germany's finance minister, said the new system to supervise banks in the euro zone would be up and running from March 1, 2014.
"We have reached the main points to establish a European banking supervisor that should take on its work in 2014," Schaeuble told reporters in Brussels after talks with his counterparts.
Settling the differences
Schaeuble, who last week clashed openly with his French counterpart, Pierre Moscovici, over the ECB's role in banking supervision said legislation for supervision would be finalised following talks with the European parliament by February 2013, leaving the bank one year to prepare for its new task.
After three years of piecemeal crisis-fighting measures, agreeing on a banking union lays a cornerstone of wider economic union and marks the first concerted attempt to integrate the bloc's response to banks' problem.
With time running out to meet a year-end deadline, both sides managed to settle their differences and Germany won concessions to temper the authority of the ECB's Governing Council over the new supervisor.
Agreement on bank surveillance is a crucial first step towards a broader "banking union," or common euro zone approach to dealing with failing banks that in recent years dragged down countries such as Ireland and Spain.
The next pillar of a banking union would be the creation of a central system to close troubled banks.
The decision also sends a strong signal to investors that the euro zone's members, from powerful Germany to stricken Greece, can pull together to tackle the bloc's problems.