Three pan-European watchdogs are to be created to oversee the financial services sector under a compromise deal struck by ministers in Brussels.

The breakthrough came after several hours of negotiations on Wednesday, with European Union finance ministers agreeing complex voting and appeal procedures should any country feel the new authorities are overstepping their brief and intruding on areas of national sovereignty.

The creation of the three watchdogs – to be based in Paris, London and Frankfurt and to cover securities, banking and insurance markets respectively – is a significant step towards more centralised, pan-European oversight of the sector.

Council of regulators in the US.

A US House panel approved legislation strengthening US authority to police large, complex firms that pose risks to the economy, advancing the Obama administration’s effort to overhaul financial rules.

The House Financial Services Committee voted 31-27 today for a bill creating a council of regulators to monitor systemic risk, shifting costs of a failure to the financial industry and giving regulators the power to break up healthy firms. The full House will debate and vote on the measure next week.

The measure will “make it much less likely that there will be failures of institutions that have become so big and so indebted to so many people that the failure affects not only themselves but the whole economy,” the committee chairman, Barney Frank, told reporters after the vote.

The legislation gives the Federal Deposit Insurance Corp. the authority to dismantle systemically risky firms and merges two regulators, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. President Barack Obama has proposed overhauling rules for Wall Street to prevent a repeat of last year’s financial market collapse, leading to more than $1 trillion in taxpayer-funded bailouts.

Swedish Presidency Announcement

EU finance ministers met in Brussels on Wednesday for the last ECOFIN meeting of the Swedish Presidency and reached important agreements regarding a new financial supervisory structure, reverse charge for CO2 emission trading, and the implementation of fiscal exit strategies.

”Today’s Council agreement on financial supervision is truly groundbreaking. It represents a crucial step towards helping to prevent future crises and shows Europe’s commitment to rebuilding the financial supervisory infrastructure,” said Swedish Minister for Finance Anders Borg.

Ministers agreed on a general approach regarding the establishment of three new authorities for supervision at the micro level: the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority.

The ECOFIN Council agreed already in October on a general approach on the establishment of the European Systemic Risk Board, which will be responsible for macro-prudential supervision. With today’s agreement, there is now a complete supervisory package in place, which enables the Presidency to enter into negotiations with the European Parliament on a firm basis.

“I hope and trust that it will be possible to reach an agreement with Parliament in the first reading of this legislative proposal, in view of the need to get the new structure up and running in the course of the coming year,” stated Mats Odell, Swedish Minister for Financial Markets and Local Government.

First step in implementing fiscal exit strategies

The ECOFIN Council adopted decisions on new and existing excessive deficit procedures within the Stability and Growth Pact. These procedures are an important step in establishing country specific fiscal exit strategies, in line with the principles for fiscal exit already agreed by the Council in October.

“The Stability and Growth Pact is really proving its value as the cornerstone of fiscal policy in the EU,” commented Anders Borg.

Ministers decided to initiate the excessive deficit procedure for nine Member States (Austria, Belgium, the Czech Republic, Germany, Italy, the Netherlands, Portugal, Slovenia and Slovakia) that have budget deficits in excess of the 3 percent reference value. The Council also agreed on recommendations on when these Member States should correct their excessive deficits.

Ministers also agreed on revised recommendations for four Member States (France, Ireland, Spain and the United Kingdom) that were already subject to the excessive deficit procedures. These Member States have taken effective action to correct their deficits, but due to the changed economic situation, the recommendations have had to be revised.

Minister decided that Greece, which has been subject to an excessive deficit procedure since April this year, has not taken effective action to bring an end to the excessive deficit situation.

Principles for exit from financial market support measures

Ministers agreed on a number of principles on exit from financial market support measures. Exit should be duly coordinated among Member States to avoid negative spillover effects. The timing of exit may differ among Member States depending on the situation, taking into account that the main purpose of the measures is to preserve financial stability. The exit strategies should provide sound banks with the right incentives for a return to a competitive market and give other banks incentives to address their weaknesses. One way to create such incentives is to start the exit process by phasing out government guarantees.

The Council also stressed the importance of public assistance and bank profits being used to build up capital buffers and not to increase bank dividends or compensation. The financial sector should immediately implement sound compensation practices.

Sources: se2009.eu and CNBC