European Union officials were set to approve the creation of a central banking supervisor Monday, even though they still squabbled over the next steps in the bloc's quest to stabilize its financial system.

The expected decision by the finance ministers from the 28-country bloc at their meeting in Luxembourg clears the final legal hurdle to the establishment of the new banking supervisor, which will be operated by the European Central Bank.

"This marks an important step," German Finance Minister Wolfgang Schaeuble said.

The so-called single supervisory mechanism is set to be operational late next year after assessing the European banks' balance sheets to identify possible capital shortfalls. If it finds that a bank needs help, another pillar of the bloc's so-called banking union would step in — a centralized authority to unwind or prop up ailing lenders that would have a joint fund at its disposal.

However, the ministers were still far from reaching an agreement on how to design and fund such a bank rescue authority.

Germany and other countries that have paid the bulk of Europe's bailout programs have concerns about the institution's legal basis and fear their taxpayers will be stuck with bills to clean up messy banks in Europe's weaker economies.

Luxembourg Finance Minister Luc Frieden argued the 17-nation eurozone needs a credible financial backstop at the European level, especially since most banks now operate across borders.

"Most banks are no longer national banks ... that's why the restructuring also has to be done at a European level, with European funds," he insisted.

European officials are determined to spare taxpayers from having to pay for further bank bailouts, and plan to rely instead on a levy to be paid by banks to build up the backstop fund. To build up sufficient capital using such a tax, however, will take years, maybe even decades. Some officials therefore argue the bank backstop fund should be able to borrow money in the meantime.

But Germany, Europe's biggest economy, lost no time to dash those hopes.

"The idea that one can get as fast as some think to direct bank recapitalization ... can only be explained by lack of knowledge," Schaeuble said.

The EU hopes to reach an agreement over the next two or three months to ensure the legislation can make its way through the European Parliament, whose term ends in May.