BRUSSELS | Thu Sep 2, 2010 2:16pm EDT

BRUSSELS (Reuters) - European Union diplomats agreed on Thursday to set up pan-EU financial watchdogs by the start of next year, to lead a clampdown on the bankers that many blame for the worst recession in a generation.

The trio of new financial sheriffs, to monitor banks, insurance companies and trading on markets, will be complemented by a group attached to the European Central bank that will keep watch for other economic risks like a property price bubble.

"We have reached a crucial milestone," said Michel Barnier, the European commissioner in charge of a reform of financial rules. "We have reached a political consensus on the creation of a European financial supervisory framework.

"The weaknesses of the national supervisors in the crisis has led to this creation of new powerful European authorities," said Sven Giegold, a German law-maker involved in the negotiations. "This means more Europe."

The shake-up, controversial because Berlin and London feared it would undermine their own authority over the financial sector, establishes agencies that can overrule a national regulator like the Bank of England.

They will be able to intervene in the regulation of individual banks in London and elsewhere. But their resources as well as freedom to sideline national agencies will be limited.

Their creation nonetheless centralizes financial supervision in Europe, a more fundamental shift than any foreseen in Washington.

"We had supervisory failures big time," said Nicolas Veron of Brussels think tank Bruegel.

"So we need to fix the system. The new agencies are starting small but this is the first time in the world that we have the creation of super-national financial authorities."

The agreement on supervision also clears a hurdle to writing many of the other rules for financial reform in Europe, which depend on the creation of the new authorities.

It would, for example, be up to the new markets agency to impose any bans on short-selling if markets wobbled.

"These new authorities will have the final word in mediating a dispute between national authorities in a case like Fortis," said Karel Lannoo of the Center for European Policy Studies, a Brussels think tank.

"They will be in charge and this is a historical change. Although lack of money will hinder their work, some, for example in markets, could become as powerful as the Securities and Exchange Commission."

European countries and law-makers from the bloc's parliament have been bogged down in disagreement over how to reform much of the financial industry.

Talks to break an impasse over new rules for hedge funds and private equity have so far failed to break an impasse over the treatment of off-shore and foreign funds.

Brussels, 2 September 2010


Financial supervision: Ambitious political deal reached to protect citizen's interests. José Manuel Garcia-Margallo MEP




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The European Parliament and the Belgian EU Presidency have reached an agreement on the so-called financial supervision package, the set of legislative proposals due to create a new system of financial supervision in Europe.



"I think we have reached an ambitious deal that will protect citizens' interests; it's a big step for Europe", said EPP Group MEP, Jose Manuel Garcia-Margallo, Vice-Chairman of the Economic and Monetary Affairs Committee in the European Parliament.



The legislative package is the main EU response for avoiding another financial crisis and the political deal "will provide that 'main street' no longer pays for the 'irrational exuberance' of financial entities and avoid more systemic financial crises", added García-Margallo, Rapporteur on the creation of a European Banking Authority (EBA), one of the key proposals of the package.



As most of the proposals fall under the decision-making process where the Parliament shares equal power with the Council of Ministers, the compromise reached today should be first confirmed next week at the EU Ecofin Council, then at the end of September by the European Parliament plenary.



The proposals push for direct supervision of systematically important cross-border banks, with national supervisors acting as agents of the EBA. Similar European supervision authorities will also be created for securities and markets and insurance. A European Systemic Risk Board will be created, chaired by the European Central Bank President for the first five years, to assess and prevent potential risks to financial stability. It will address warnings to the different supervision authorities, as well as to the Council and the European Parliament.



"There is a very simple reason for all this new supervisory architecture. National supervisors do not have jurisdiction to control financial entities able to operate without obstacles throughout the whole European continent. We need to learn from what has happened and build a system so that, in the case of a new crisis, we do not find ourselves as vulnerable as now," García-Margallo explained.



For further information:

José Manuel GARCÍA-MARGALLO Y MARFIL MEP, Tel: +32-2-2845904

Pedro López de Pablo, EPP Group Press & Communications Service, Tel: +32-475-493352