It may not be the “revolutionary change in the way banks are treated in the European Union” that the Irish finance minister, Michael Noonan, trumpeted after the late-night session.

The agreement is intended to reduce the chance that a bank crisis will descend into a government debt crisis, as happened in Spain and Ireland when the cost of bank rescues helped undermine public finances.

But because Germany insisted on high hurdles before its taxpayers would be made liable for bank failures in other countries, there remains a risk that weaker countries could still become victims of the failure of a big domestic bank.

“There is not much sharing of the costs across the euro zone,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. The 60 billion euro, or $78 billion, in euro zone money that has been allocated for bank recapitalization “is nothing,” she said. “It would be exhausted very quickly.”

The deal on banks is aimed at breaking the so-called doom loop, in which struggling governments take their states deeper into debt to save their banking systems, only to face sky-high sovereign borrowing costs.

Analysts were cautious about declaring an end to Europe’s banking woes.

“Is it the best solution to break the doom loop? Of course it’s not,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

He said Germany was unlikely to agree to pay for past mistakes by banks or bank regulators in other countries, even after the German national elections in the autumn.

Mr. Véron said he expected the agreement to be modified as it went through the European Parliament, as leaders weigh some of the consequences of forcing creditors and some depositors to help pay for bank rescues.

But as European Union heads of state arrived here on Thursday for a two-day summit meeting, they sought to put the finance ministers’ deal in the best possible light.

François Hollande, the French president, hailed the breakthrough as “extremely useful for protecting savers and to avoid having taxpayers pay for a banking crisis for which they are not responsible.”

The German chancellor, Angela Merkel, speaking to her Parliament in Berlin on Thursday before heading to Brussels, thanked her finance minister, Wolfgang Schäuble, for his efforts on the bank deal. “The priority will be to make the creditors and owners responsible, and we get away from taxpayers always putting up for the banks,” Ms. Merkel said. “This is really necessary.”

The new system is expected to go into full effect in 2018. It specifies the order in which banks’ investors and creditors, and then uninsured depositors, will face losses.

Deposits under 100,000 euros would remain protected. Small businesses and individual savers with more than 100,000 euros would enjoy better protection than other categories of unsecured creditors when losses were imposed.

Such clarity could help prevent a recurrence of the chaos that ensued during the bailout for Cyprus in March, when governments and international lenders initially agreed to penalize small savers because of the lack of a template for imposing losses on the country’s troubled banks.

Ms. Diron, the London economist, warned that the agreement could increase the interest rates banks pay to raise the money they lend to customers.

But that is a necessary adjustment, she said. Rates banks paid in the past were too low, because investors assumed that they would be bailed out by governments.

“Investors will now price in the risk of losing their money,” Ms. Diron added. “But that should have happened already.”

The deal gives countries like Britain some flexibility to choose where losses will fall, as long as bondholders and shareholders representing 8 percent of a failing bank’s total liabilities are wiped out first.

Sweden won leeway for even more flexibility to make exemptions to certain classes of creditors in exchange for other commitments.

Germany was especially wary of endorsing new rules that could eventually mean the use of shared European money to directly inject new capital into other countries’ failing banks. As a concession to German concerns, the ministers agreed to significant measures.

Before using cash directly from the shared European fund, a bank would need to draw the maximum amount permissible from its own government bailout money. Governments then would need to put any initial money drawn from the shared European fund onto their national balance sheets.

After that, a bank would still need to wipe out all of its remaining senior bondholders before, finally, being able to use the shared European fund directly.

The European Union’s governments and members of the European Parliament also confirmed on Thursday that they had finally agreed on a European Union budget through the end of the decade.

That funding amounts to nearly 1 trillion euros for farming, science, infrastructure and overseas aid, as well as money to support the daily business of running the organization.

Article source: http://www.nytimes.com/2013/06/28/business/global/european-banking-deal-is-seen-as-progress-with-flaws.html?partner=rss&emc=rss