Europe clinched a deal on Thursday to give the European Central Bank new powers to supervise euro zone banks from 2014, embarking on the first step in a new phase of closer integration to help underpin the euro.
After more than 14 hours of talks and following months of tortuous negotiations, finance ministers from the European Union's 27 countries agreed to hand the ECB the authority to directly police at least 150 of the euro zone's biggest banks and intervene in smaller banks at the first sign of trouble.
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"This is a big first step for banking union," EU Commissioner Michel Barnier told a news conference. "The ECB will play the pivotal role, there's no ambiguity about that."
The euro rose to a session high in Tokyo of 1.3080 against the U.S. dollar on news of the deal.
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 problem banks.
The new system of supervision should be up and running by March 1, 2014, following talks with the European Parliament, although ministers agreed that could be delayed if the ECB needed longer to prepare itself.
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 it their full political backing.
In an about-turn, German Finance Minister Wolfgang Schaeuble dropped earlier objections that had led him to clash openly with his French counterpart, Pierre Moscovici, last week over the ECB's role in banking supervision.
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 17 members, from powerful Germany to stricken Greece, can pull together to tackle the bloc's problems.
'STEP BY STEP'
Other difficult issues remain.
At a summit in June, EU leaders pledged that once a common bank supervisor was in place, the bloc's rescue mechanism would have the power to directly recapitalize struggling banks.
Countries like France, Italy and Spain are keen for those powers to be in place as soon as possible. But Germany, worried it could be forced to foot the bill for struggling banks across the bloc, is not in a rush.
"We have reached the main points to establish a European banking supervisor that should take on its work in 2014," Schaeuble told reporters. "We stand by what we agreed, to bring Europe forward step by step."
In the longer term, there is also disagreement over how the burden of winding down failed banks should be shared.
The deal foresees banks with assets of 30 billion euros, or larger than one-fifth of their country's economic output, being supervised by the ECB rather than national supervisors.
France's Moscovici said that would put more than 150 banks under the ECB's watch.
Critically, it also gives the ECB authority to widen its authority to smaller banks if problems arise.
That will satisfy Germany, which wanted to maintain primary oversight of its savings and cooperative banks, nearly all of which will not fall under direct surveillance from Frankfurt unless they run into problems.
Talks ran into the early hours of Thursday because ministers needed to resolve a potential conflict of interest between the ECB's roles as supervisor and as guardian of monetary policy.
Such a conflict could arise if, for example, the ECB were to keep interest rates low to prop up banks.
They agreed to introduce a mediation panel to resolve disputes with national supervisors, a move Germany was satisfied would act as a counterbalance to the authority of the European Central Bank's Governing Council.
A steering committee will guide the work of the supervisory body, which in turn is answerable to the ECB's Governing Council. That leaves the final say with the ECB.
Reaching a deal also required granting concessions to Britain, a member of the European Union that does not use the euro, which worried that the ECB would undermine its autonomy in policing the City of London, Europe's top financial centre.
London had asked for changes to the system of voting when regulators from across the European Union meet to flesh out EU law, such as defining the capital reserves that banks can use as buffers.
Those regulators meet under the umbrella of the European Banking Authority, but London had been concerned that countries in the euro zone would force through rules in their favor.
EU ministers agreed that a double vote would now take place - one for those in the banking union and another for non-euro countries outside - before decisions on EU regulation are taken.
(Additional reporting by Jan Strupczewski, Luke Baker, Noah Barkin and Leigh Thomas; Editing by Peter Cooney)