Analysts have warned that the step will make little to no difference, and European Parliament President Martin Schulz called it a "drop in the ocean."
Leaders also called on the bloc's European Investment Bank to kick-start investment and job creation by boosting lending to small and medium-sized firms by up to 150 billion euros through until 2015. The increase in lending is made possible by a capital increase decided last year.
PROGRESS: NEW EU RULES MAKE SURE TAXPAYERS WON'T FOOT THE BILL FOR BANK FAILURES
In the small hours of Thursday morning, European finance ministers reached a compromise on rules enshrining that bank rescues will be primarily funded by the banks' shareholders and creditors, with taxpayer money only a last resort. The new rules create certainty for investors and strengthen Europe's banking system.
The decision draws on the lesson of the 2008-2009 financial crisis when several European governments had to pump dozens of billions of taxpayers' money into their banks to stop the financial system from collapsing.
If a bank fails, losses will be forced on its shareholders, creditors and holders of uninsured deposits worth more than 100,000 euros to cover 8 percent of a bank's total liabilities. Then the government can chip in, as much as another 5 percent of liabilities â¿¿ but no more.
DEADLOCK: LONG WAY STILL TO GO ON THE BANKING UNION
Analysts say restoring confidence in Europe's highly fragmented banking sector is one of the key policies to turn the tide on the 17-nation eurozone's debt crisis.
The plan was first endorsed by EU leaders a year ago when markets were worried that Spain â¿¿ like Greece, Ireland and Portugal before â¿¿ might be forced to seek a full-blown bailout to stay afloat after pumping billions into its ailing banks.
The plan consists of three main pillars: Centralized oversight of big banks anchored at the European Central Bank, a central authority able to prop up or wind down ailing banks, and a jointly guaranteed deposit insurance.