Europe deepens union with ECB as chief bank watchdog

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 the euro zone's biggest banks and intervene in smaller banks at the first sign of trouble.

"We have a deal," said an EU official, sending the euro to a session high in Tokyo of 1.3080 against the U.S. dollar.

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 the end of next year, 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 their full political backing.

In a dramatic about-turn, German Finance Minister Wolfgang Schaeuble ditched his 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.