German Finance Minister Wolfgang Schaeuble EU
Germany's Finance Minister Wolfgang Schaeuble listens to his Lithuanian counterpart Rimantas Sadzius (R) during a European Union finance ministers meeting in BrusselsReuters

European Union finance ministers have finally shaken hands on a plan for winding down failed banks, as the eurozone currency area takes a leap forward in sealing its long-awaited banking union.

It seeks to avoid the chaotic meltdowns of recent years, such as in Cyprus where failing institutions almost bankrupted the country and led to a €10bn (£8.35bn, $13.7bn) bailout loan from the troika of the European Commission, ECB, and International Monetary Fund (IMF). It also aims to prevent billions of euros being ploughed into failed institutions to bail them out.

The banking union is built on three pillars. The first sees the European Central Bank (ECB) appointed as supervisor for troubled institutions (the Single Supervisory Mechanism); the second is a resolution regime to shut down failed banks (Single Resolution Mechanism); and the third is a €100,000 deposit guarantee to protect consumers with money tied up in those banks (Deposit Guarantee Scheme).

Wolfgang Schaeuble, Germany's finance minister, said at the end of a length meeting between his peers that the "final pillar for the banking union has been achieved".

EU member state leaders will meet in Brussels to sign off the deal in early 2014, before it will be taken for final approval or amending by the European Parliament.

The protocol for the closure of failing eurozone banks would be kicked off by the European Central Bank (ECB), which will take responsibility for troubled institutions from 2014, and a new agency with powers to shut down institutions.

Under the newly agreed proposals, the ECB would need to flag up any bank it thought was facing serious difficulties. A resolution process would then kick in to carefully and methodically wind down the bank.

This would be conducted by a new agency and funded by a €55bn levy on the financial sector. If money available from the pot is not enough, the national government involved would have to fund part of the winding-down of the institution.

If it could not afford to do so, it would have to apply for a bailout loan from the European Stability Mechanism (ESM), a central fund for the rescue of near-bankrupted eurozone states.

Some had hoped banking resolutions would be funded by all eurozone states contributing into a central pot. Germany, a powerhouse in the currency bloc, resisted this suggestion in favour of the ESM process, which comes with strict rules and conditions for the member state tapping off funds.

Others were not happy with the final deal. Michel Barnier, the European commissioner for financial regulation, said he would like to have seen things done differently.

"When I compare it with my original proposal I have regrets," he said.

Another official who had been involved in discussions told the Reuters news agency it was a compromise that "could be way better".

UK Chancellor George Osborne, who was at the meeting, is seeking legal protection from the EU so that Britain does not have to help fund the rescue of eurozone banks.

"We're not going to stand in the way of the eurozone banking union as long as the rights of those countries not taking part are properly protected," a British diplomat told The Telegraph.

"That means we must not be financially liable for decisions taken as part of banking union."