European Union leaders have agreed to establish a single supervisor for banks in euro area and to put in place the required legal framework by the end of this year, so that it can be phased in next year.

In a statement after Thursday's meeting in Brussels, the European Council said a specific and time-bound roadmap for the plan will be presented at the European Council's December 2012 meeting. The meeting acknowledged the need to "break the vicious circle between banks and sovereigns."

According to a draft statement, the lawmakers are urged to proceed with work on the "legislative proposals on the Single Supervisory Mechanism (SSM) as a matter of priority, with the objective of agreeing on the legislative framework by January 1, 2013."

"Once this is agreed, the SSM could probably be effectively operational in the course of 2013," European Council President Herman Van Rompuy said Thursday. The SSM is open to all member states wishing to participate.

The deal reportedly is the result of a compromise between France and Germany, which were at loggerheads over the timing of the SSM. Incidentally, the differences between leaders of the two largest Eurozone economies were very much visible even before the summit.

Germany wants to impose stricter budgetary discipline among Eurozone members, while France opposes the tough austerity policy being pursued aggressively by the bloc. Also, while France and EU backed a single supervisor for all the 6,000 banks in the euro area, Germany wanted to limit the scope of the scheme to specific lenders.

Speaking at the German lower house of Parliament, ahead of the summit, Chancellor Angela Merkel proposed giving stronger powers to the European Union to intervene in national budgets and suggested creation of a new fund at EU level to finance specific projects in struggling nations.

As per the latest agreement, the region's bailout fund, the European Stability Mechanism (ESM), will be able to recapitalize banks directly, when an effective SSM is established for euro area banks.

"The SSM will be based on the highest standards for bank supervision and the ECB will be able, in a differentiated way, to carry out direct supervision," the Council said. The leaders agreed on the need to ensure a clear separation between ECB's monetary policy and supervision functions.

Regular supervisory tasks will be carried out by national supervisors as much as possible. The leaders also agreed to create a single rulebook underpinning the centralised supervision.

Meanwhile, hailing the good progress being made by Greece to bring the bailout program back on track, the euro area leaders urged the country to continue budgetary and structural policy reforms.

"This is necessary in order to bring about a more competitive private sector, private investment and an effective public sector. These conditions will allow Greece to achieve renewed growth and will ensure its future in the euro area," they said in a statement on Greece.

The policymakers said the Eurogroup will examine the outcome of the review in light of the troika report and will take necessary decisions.

RTTNews