European Union leaders have agreed to set up a single European banking supervisory body. A legislative framework is to be in place by January1st, with the supervisory body starting work later in 2013.

A decision on banking union, seen as key to resolving the three-year old euro zone debt crisis.

European leaders took the first step towards that in Brussels on Friday.

They agreed to create a single supervisor to oversee all euro zone banks from 2013.

It’s not yet clear what powers that supervisor - the ECB - will have, or how many banks it will monitor.

But EU officials say the European Central Bank will have the power to intervene in any of the eurozone’s 6,000 banks.

Francois Hollande, French President said, "This evening, we’ve managed to achieve the stability and efficient mechanisms necessary to avoid any future banking crisis. It’s been a good evening for the markets and public opinion, and for all those who are waiting for Europe to get back on track."

The banking supervisor opens the way for the eurozone’s rescue fund to inject capital into struggling banks.

But German Chancellor Angela Merkel has already raised new hurdles to using the fund to recapitalise banks directly.

Angela Merkel, German Chancellor said, "Just getting the finance minister to establish the legal framework quickly is very ambitious. We shouldn’t disappoint markets by making short term announcements again and again."

EU leaders left one of the trickiest issues to one side - what representation non-euro zone banks will get at the ECB if they join the scheme.

The UK, which has Europe’s biggest banking sector, and other countries are concerned their banks could end up at a disadvantage.

Other obstacles still have to ironed out, but it’s the right move for the euro zone, says Angus Cambell from London Capital Spreads.

Angus Cambell, London Capital Spreads said, "Politicians aren’t known for moving quickly, so what we have seen obviously is that things have taken a very long time, but we have seen gradually movement in the right direction, that’s the main thing. Is it too late for these measures? Possibly not."

For once, the EU leaders’ summit wasn’t under heavy pressure from financial markets.

Banking union may still be a distant prospect but investors seem to be feeling slightly more positive about Europe’s progress, even though they are still waiting to see the troika’s report on Greece and hear whether Spain is going to request a bailout.