European governments gave their approval on Friday to an overhaul of the way banks and markets in the region are supervised, which was agreed in principle on Thursday night. However, they warned that new pan-European Union watchdogs would need to exercise their powers cautiously. In Germany, Leo Dautzenberg, a member of Chancellor Angela Merkel’s ruling Christian Democratic Union, and one of its finance policy experts in parliament, hailed Thursday night’s agreement on the EU financial supervision package as “closing an important gap in financial market regulation”. But he warned the three new EU-level watchdogs – for the banking, insurance and securities markets sectors – to use their powers over national institutions and markets with care. Under the proposals, these watchdogs will not supervise companies or markets directly, leaving this to national authorities. But they will be required to draw up common technical rules and standards and could acquire additional legally binding powers – including over individual companies – in “emergency situations”. Mr Dautzenberg also stressed the importance of the “fiscal safeguard” incorporated into the agreement. This prevents the watchdogs from imposing decisions that affect budgets in member states.

UK government officials have already said they believe the final package, secured after months of negotiation, is “a very good outcome for UK” but were understood to be scrutinising the fine details hammered out in Thursday’s negotiations. French officials said they were satisfied and a “real architecture” for European financial supervision had been created, although the final deal falls short of their ambitions for ­centralised pan-European powers.

The European Central Bank is also likely to have been pleased by the outcome, which gives it a central role in assessing future risks to Europe’s financial system and allows the ECB president to chair a new European Systemic Risk Council for the first five years. Officials declined to comment publicly, however. The reaction suggested that the proposed legislation could get more formal backing when EU finance ministers meet in Brussels on Tuesday. The legislation could then be put to the European Parliament this month. EU officials were hoping to have the approval process completed by the end of September so that the new watchdogs can get up and running by January 1. But soothing concerns in the City of London, which is nervous about supervisory powers shifting away from the UK, might take much longer. In particular, there are fears that Brussels will now attempt to give more powers to the new watchdogs though other legislative initiatives that are in the pipeline – in areas ranging from derivatives to short-selling rules. “The concept agreed in principle [in the supervisory package] is fine. But this is being circumvented through numerous other legislative proposals from Brussels, in which control is being wrested away from national regulators,” said Barney Reynolds, a partner at Shearman & Sterling in London.

source: The Financial Times : http://www.ft.com/intl/cms/s/0/08e907da-b784-11df-8ef6-00144feabdc0.html