- Europe took its first big step towards banking union early on Thursday morning
- Eurozone finance ministers agreed a plan to cede power to a common bank supervisor
- Reform requires governments to surrender jealously guarded control over national banks
- Britain, Sweden and other countries outside the banking union won coveted safeguards
Europe took its first big step towards banking union early on Thursday morning, as eurozone finance ministers finally agreed a plan to cede power to a common bank supervisor in Frankfurt.
After almost four months of fraught diplomacy that laid bare deep Franco-German divisions, finance ministers brokered terms for the European Central Bank to begin direct supervision of big eurozone lenders from early 2014.
The reform requires governments to surrender jealously guarded control over national banks, in the most concerted financial integration project since the creation of the single currency.
At the same time, Britain, Sweden and other non-eurozone countries outside the banking union won coveted safeguards to check the power of the ECB and maintain some influence over technical standards applying to all EU banks.
The supervision plan is the first -- and probably the easiest -- step towards a eurozone banking union designed to shore up confidence, resuscitate cross-border bank lending and bring down painfully high borrowing costs for peripheral banks.
Germany's willingness to give some ground paved the way for a deal that beats the EU's self-imposed year-end deadline.
But during the talks, Wolfgang Schäuble, the German finance minister, made plain that one of the key purposes of the reform -- to allow common resources in the eurozone's €500bn rescue fund to be injected directly into ailing banks -- was out of the question until well into 2014.
"Again and again we have created expectations we cannot fulfil and that is very dangerous. We should be modest," Mr Schäuble said, in a clear warning to countries that regard the creation of a central supervisor as a stepping stone to more risk-sharing.
Overcoming the most difficult outstanding issues took almost 12 hours of talks, stretching to 4am on Thursday. Roughly four hours was spent attempting to bridge differences between Paris and Berlin, according to officials involved.
Under the compromise, the ECB will have direct responsibility for banks with assets of more than €30bn, or representing more than a fifth of a states' national output.
This covers almost all French lenders but leaves most of Germany's retail banking sector -- and its politically powerful network of savings banks -- effectively exempt and under the ambit of the German national authorities.
However, the ECB retains the power to intervene in any bank, should it decide to do so. While the compromise could permit all sides to declare political victory, it remains unclear whether the details effectively establish a two-tier regime or give the ECB ultimate responsibility for all banks.
Berlin also won concessions on the timing of implementation, so that no fixed deadline is included in the text for the ECB to take direct oversight of the biggest banks.
There remains, however, a series of specified goals that could reduce the transition period to as little as a year, meaning the system could be up and running by January 2014.
Another major point of friction was over the rights of non-eurozone countries, both inside and outside the banking union. Eurozone countries eventually dropped objections to UK-led demands for a "double majority" principle at the European Banking Authority, the EU agency coordinating the work of national supervisors.
This ensures that any EBA decisions are at least approved by a plurality of countries outside the banking union -- a principle with potentially wider application as Britain seeks to coexist within the single market with a more integrated eurozone.
A showdown between big and small countries over the voting arrangements for setting regulations within the banking union emerged as the final outstanding issue. Luxembourg and Austria led objections to scrapping the ECB's one-country, one-vote principle in favour of weighted votes that gave greater clout to France and Germany.
The package will still require approval from the EU parliament and the German Bundestag, a process that could take several months in total.