Europe seals deal on financial supervision

"This is a historic watershed moment," Belgian finance minister Didier Reynders said before the vote. As holders of the EU's rotating presidency, Belgian officials have been conducting difficult talks with representatives of the European Parliament over the past few months in a bid to narrow their differences.

Following proposals from the European Commission, member states reached a political agreement last December, but MEPs were quick to voice their opposition, brandishing the deal as overly watered-down and riddled with vetoes.

Wednesday's vote on a compromise text means three new European Supervisory Authorities (ESAs) will start work in January next year, co-ordinating national supervisors in the areas of banking, pensions and financial markets.

Part of their role will be to improve the flow of information between national regulators, after the financial crisis in 2008 exposed the vulnerability of national financial systems to the collapse of large cross-border firms.

"Europe will now have a supervisory model that is adapted to its needs. You have to remember that half the banks in Europe come from other states," said EU financial services commissioner Michel Barnier.

A European Systemic Risk Board will monitor for the build-up of risks in the EU financial system as a whole, and will issue 'recommendations' whenever it detects a threat such as a housing or stock market bubble.

Its will be headed by the European Central Bank chief for the first five years, after which arrangements will be reviewed.

Implications

Under the final deal, the ESAs will get powers to settle disputes among national financial supervisors if they fail to agree on a cross border issue, such as the Fortis bank collapse in 2008 which saw arguing between the Netherlands and Belgium delay the rescue operations.

They will also be able to impose temporary bans on risky financial products and activities, as well as propose the setting up of new Europe-wide technical standards in the different areas.

If national supervisors fail to act, then the new bodies in theory can also impose decisions directly on financial institutions in extreme cases, although it remains to be seen how this will work.

"The new regulators must be responsible," cautioned centre-left MEP Peter Skinner who championed strong powers for the pensions authority and steered the legislation through parliament.

In general however, MEPs did not win the power for the authorities to directly supervise banks and other financial players, leaving that task to national regulators, although a review after three years could see the ESAs' powers grow.

Parliament's call for all three authorities to be located in Frankfurt close to the European Central Bank was also shelved in the final compromise.

Instead, the European Banking Authority (EBA) will be based in London, and a European Securities and Markets Authority (ESMA) in Paris, with only the European Insurance and Occupational Pensions Authority (EIOPA) set up in Frankfurt.