The deal is a boost for EU leaders meeting for a summit today in Brussels, since it represents a key milestone in the creation of a banking union, blueprints of which were drafted one year ago.
"For the first time, we agreed on a significant bail-in to shield taxpayers," said Dutch Finance Minister Jeroen Dijsselbloem, referring to the process in which shareholders and bondholders must bear the costs of restructuring first.
Under the agreement, countries will retain some flexibility about exactly when and how they must impose losses on a failing bank's creditors.
Flexibility provisions lengthened debate
This flexibility held up talks as member states sought to match the new requirements best to their own circumstances and experiences: many German banks wanted strict, automatic bail-in procedures, while France and some noneurozone countries such as the UK demanded more national discretion.
The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis. The bailout of Cyprus in March heralded a harsher approach – forcing losses on depositors – which will now be replicated elsewhere.
French Finance Minister Pierre Moscovici signalled that ministers also agreed to French demands that the eurozone's rescue fund, the European Stability Mechanism, can be used to help banks in the 17-nation currency area that run into trouble. Agreement on bail-in was a precondition for unlocking the rescue funds.
"It makes the whole thing coherent," said Moscovici. "It creates a solidity for the system and a system of solidarity," he told reporters.
Under the rules, which would come into effect by 2018, countries would be obliged to distribute losses up to the equivalent of 8% of a bank's liabilities, with some leeway thereafter.
ECB to take over eurozone supervision next year
But thorny issues lie ahead, not least whether countries or a central European authority should have the final say in shutting or restructuring a bad bank.
The European Commission, the EU executive, is expected to unveil its proposal for a new agency to carry out this task of "executioner" as early as next week, officials said.
"The most important discussion has yet to start and that is how decisions on restructuring will be made," said Nicolas Veron, a financial expert at Brussels-based think tank Bruegel. "It's premature to say that Europe is getting its act together."
Many Europeans remain angry with bankers and the easy credit that helped create property bubbles in countries including Ireland and Spain, which then burst and plunged Europe into a recession from which it has yet to recover.
The European Central Bank takes over the supervision of eurozone banks from late next year, completing one pillar of banking union.
The ECB will run checks on banks under its watch. This new EU law on sharing losses could be used as the blueprint for closing or salvaging those banks it finds to be weak.
The second leg of banking union would be the resolution authority to shutter banks or restructure them. But the pace of progress depends in large part on Germany, which is reluctant to agree to such a move ahead of elections in September.