NICOSIA, Cyprus—When euro-zone leaders decided in June to equip the European Central Bank with new powers to police banks in the currency union, the agreement appeared clear. "When an effective single supervisory mechanism is established," they declared, the euro zone's bailout fund would "have the possibility to recapitalize banks directly."

German Finance Minister Wolfgang Schäuble, left, with Eurogroup President Jean-Claude Juncker Friday. Associated Press

Investors cheered. Finally, the euro zone was going to break a "vicious circle" that had proved fatal for Ireland and now was threatening Spain: that of failing banks damaging the finances of governments whose own weakness in turn eroded confidence in national banks. What was less clear from the leaders' statement was exactly what they meant by "effective." It is now evident that agreement over what's required of an effective supervisor could take some time.

For the European Commission, the European Union's executive arm that the leaders charged with drafting the proposal, the precondition for allowing the European Stability Mechanism to recapitalize banks directly would be met once the ECB starts policing already bailed-out banks—ideally on Jan. 1, 2013.

It didn't take long for German Finance Minister Wolfgang Schäuble to communicate that he had a different understanding. "I don't see that one can have direct recapitalization of banks from the European Stability Mechanism already from Jan. 1," he said at a meeting with his euro-zone counterparts in Cyprus at the weekend. Building up the personnel and expertise to "effectively" supervise the euro zone's banks would take time, he warned.

How much time? "It wouldn't be helpful to mention dates as long as we aren't sure," he told reporters. That sentiment was echoed by Jan Kees de Jager, the finance minister of the Netherlands—along with Germany one of the currency union's richest members—who said setting up an "effective" banking supervisor would take "a long time."

It is inconceivable that the ECB could "effectively" supervise small local banks like Germany's savings banks, known as Sparkassen, and it should instead focus on large "systemic" institutions, Mr. Schäuble has said repeatedly. The commission and euro-zone members such as France, meanwhile, insist that all 6,000-plus banks in the currency union should be under the ECB remit.

The German objection to opening up local banks' books to the ECB appears in part driven by concern about what happens next. With a bank supervisor in place, completing the euro-zone "banking union" will require establishing a regional fund to provide deposit guarantees and for financing the "resolution" of failing institutions. According to the German savings banks association, these plans are really about raiding Germany's financial safety nets to bail out shaky foreign banks.

The Long Road Ahead

Jan. 1, 2013: Euro-zone supervisor starts policing bailed-out banks

July 1, 2013: Supervisor starts policing large systemic banks

Jan. 1, 2014: Supervisor starts policing all 6,000 euro-zone banks

Jan. 1, 2015: States have to start building up resolution funds

Jan. 1, 2018: System to "bail-in" private creditors comes into force

Jan. 1, 2025: National resolution funds have to reach 1% of bank deposits

-- European Commission

"It is obvious that European supervision over savings and cooperative banks is meant to prepare a grab for their safety systems," its president warned.

With that, the Sparkassen association pointed out a significant flaw in the June summit plan. It is difficult to see how a central supervisor can decide to withdraw a bank's license to operate if it doesn't know what will happen and who will pay after it makes that call.

The ECB seems to agree. "You need all three elements [common supervision, a resolution regime and better-coordinated deposit-insurance funds]," Jörg Asmussen, a member of the ECB's executive board, said Friday, after discussing the supervisor proposal with finance ministers. "If the latter two are missing, supervision cannot be effectively exercised."

At the moment, there are no Europe-wide resolution or deposit-insurance funds to pay for any problems a common supervisor may detect. That's a sharp contrast with the U.S., where the Federal Deposit Insurance Corporation guarantees the contents of most savers' bank accounts and oversees and finances bank resolutions.

Paying for, and deciding on, bank failures has been particularly challenging for the euro zone in this crisis. Because most countries had no industry-financed resolution funds, nor a legal system allowing them to impose losses on bank creditors in an orderly way, national governments pumped hundreds of billions of euros in taxpayer money into failing lenders.

Just two weeks before the June summit, the commission proposed a new law that would force all states to build up national resolution funds and, crucially, set up a system to impose losses on creditors when a bank runs into trouble. But that plan falls far short of a "banking union," and the timing is off.

The law isn't meant to take effect until 2015, and countries have 10 years to build up their resolution funds to just 1% of covered deposits. While national funds would be allowed to borrow from each other, there is no plan to pool them. The element aimed at drawing contributions from private investors who own bonds in failing banks, known as bail-in, won't come into force until 2018.

While Germany opposes creating a common resolution fund, Mr. Schäuble now wants the bail-in system to take effect in 2015. Finnish and Dutch officials also say privately that they expect the cost of direct recapitalizations from the euro-zone bailout funds to be limited through private burden sharing—a stance that won't sit well with bank bond holders.

As discussions this weekend showed, non-euro countries in the EU are worried that a powerful new euro-zone banking supervisor could leave them without a voice in policing their own banks. But the main obstacle to its rapid establishment may well be finding agreement within the euro zone over what would make the new supervisor "effective."

Write to Gabriele Steinhauser at