The ESM's board of governors held their inaugural meeting in Luxembourg this afternoon prior to a gathering of eurozone finance ministers.
Capital will be paid into the ESM in stages so that by 2014 it will be able to lend a total of €500 billion.
It will run in parallel to its temporary predecessor, the European Financial Stability Facility (EFSF), before that is wound down when it has completed its lending to Greece, Portugal and Ireland.
Jean-Claude Juncker, the prime minister of Luxembourg who chairs meetings of eurozone finance ministers and will also chair the ESM board, said that the eurozone was now “equipped with a permanent and effective firewall”.
Questions remain about how the ESM will be able to recapitalise banks directly. Spain and Ireland fear that they will not be able to call on the new fund to help bail-out their struggling financial institutions.
Leaders of eurozone member states had indicated in June that the ESM would be able to recapitalise all banks but a statement by the finance ministers of Finland, Germany and the Netherlands last month suggested that “legacy” bail-outs – those already taking place – would not be covered.
Klaus Regling, the managing-director of the ESM, said that the subject had not yet been discussed at European Union-level.
The issue could have significant consequences for Spain and Ireland which are desperate to get bank rescues off the government balance-sheet.
The ESM board of governors is made up of the eurozone's 17 member states, with the president of the European Central Bank and the European commissioner for economic and monetary affairs able to attend meetings as observers.
The agency will be based in Luxembourg with a managing-director, board of directors and a management board.
Germany and France will be the ESM's largest contributors, paying in 27% and 20% respectively.
The ESM entered into force today after having been ratified by all 17 eurozone countries. It was scheduled to start operating on 1 July but was delayed because Germany's constitutional court was asked to rule on whether it was in breach of the country's basic law.