By Pierre Christopher

European Union finance ministers have reached a deal over new banking supervision rules following marathon 12-hour negotiations in Brussels running into the early hours of this morning. Germany had decided to resist the central eurozone rescue fund for failed banks, favoured by France, and held out for a network of national funds instead.

Ministers compromised on a hybrid scheme – a network of national resolution funds under a European umbrella. National contributions will be gradually mutualised over 10 years in a central €55bn kitty. The deal means governments will be required to set up national funds to cover the costs of bank failure. They will be financed by bank levies.

Italy’s Finance Minister Fabrizio Saccomanni said: “It was a compromise, we had to take into account Germany’s worries but we obtained that at some point it will become a common fund that will be supported by backstop mechanisms.”

Berlin would concede on an eventual common eurozone fund only once safeguards were given to ensure senior bank creditors shoulder the costs before European funds and governments do. Officials would still need to hammer out guarantees that German taxpayers were protected as much as possible, it was agreed, although Germany gave the green light on a general approach. It represented a breakthrough on what had been a sticking point for the banking union.

German Finance Minister Wolfgang Schauble was given assurances that the European Union’s bail-out fund – the €500bn European Stability Mechanism – would not be used as a ‘credit-line’ while national funds were being built up.

German demands on voting powers were noted but ministers will have to revisit the issue at a final emergency meeting next Wednesday. In the compromise text, larger countries are given greater voting power to block the release of common resolution funds and a two-thirds majority requirement would give Germany a blocking minority if it were joined by the Netherlands and Finland – for example. Agreement will need to be reached next week ahead of the EU Summit.

A new intergovernmental treaty – similar to the fiscal compact on national budgets – might also be needed to underpin a mutualised rescue fund arrangement. This was likely to disappoint the European Parliament as MEPs dislike pacts outside existing EU treaties Council negotiators led by the Lithuanian EU Presidency today were to head straight into further detailed negotiations, once officials had drawn breath. There was still a need to hammer out a compromise with MEPs, particularly on the role of the supervisory authority. Germany had already dropped objections to the European Commission becoming the main authority for winding up the banks – a key French demand.

Today’s trilogue talks aimed to address the issue of whether the European Banking Authority should be able to require national authorities to accept binding mediation in the event of disputes between them. Other key pieces of legislation for the planned banking union are also be tackled such as the relationship between the single supervisory system on and non-eurozone banks; and also the extent to which deposit guarantee schemes could be drawn up to help rescue a failing bank. A final trilogue is scheduled for December 18.

The Single Resolution Mechanism should come into effect in 2016, if agreement can be reached this year. A deal had been held up by the recent German elections, which saw the government harden its position but the self-imposed deadline for an agreement by Christmas demonstrated that demands for a fully-functioning single currency bloc banking union were as strong as ever.

Pierre Christopher is a researcher at the Brussels communications firm ResEuropa – a Policy Review partner