Diners will be able to eat their meals above a Halifax branch, whilst looking out across to Edinburgh Castle.
The scheme was approved by the city council against the advice of its own officers' recommendations.
The novel concept got the go-ahead after the local authority side-stepped protocol because plans for a new strategy that would supersede existing policy for the district are already under way.
Previous attempts to attract big stores to the site vacated by clothing firm Gap after it relocated to the east end of the street failed. Planners were convinced further similar moves would also be fruitless.
The planned redevelopment of the St James Centre and the culture of larger stores such as Harvey Nichols locating at the St Andrew Square end of Princes Street is said to have allowed scope for the rethink.
Officials who had recommended rejection of the Lloyds plan argued "the proposed uses would weaken the shopping ambience of the city centre core frontage contrary to policy".
Ian Perry, convener of the planning and management development subcommittee that approved the new restaurant, said it was hoped the move would allow more easy access for ambitious proposals to help relaunch the West End ahead of the arrival of the trams later this year.
That would also be welcome as firms have claimed to have lost hundreds of thousands of pounds because of tramworks and many shops closed in the West End during the works, when the area was compared to a "conflict zone".
Mr Perry said a different balance that would allow the evolution of the famous street was being sought. He said: "What we are trying to do is to make the west end more attractive."
The prominent city centre location was selected by Halifax as a key location for the brand in Edinburgh, a spokesman said, following the launch of its branch in Union Street, Aberdeen, in December.
The Edinburgh branch will create up to 30 jobs ahead of its opening in the summer.
The developer said the four-storey building will now be transformed into a mixed-use development, while "bringing renewed vibrancy and economic benefits to the area".
Dougie Peters, finance director of BAM Properties, which is developing the site for Lloyds Banking Group, said, "This is great news for Princes Street as we believe our proposals will help increase the number of people to the west end of the street.
"The restaurant will also drive the council's ambition to extend the Princes Street economy outwith retail trade hours.
"We are speaking to a number of potential operators about the restaurant space.
"We are delighted to see this landmark building finally begin to come to life again."
Halifax is planning to open a third Scottish branch in Sauchiehall Street, Glasgow.