FRANKFURT, Feb 5: The European Union will set up two new watchdog bodies to draw up rules for banks and insurers, possibly in the next few weeks, sidelining the European Central Bank, EU sources said on Wednesday.

As worries mount about the health of many European financial institutions, the two groups may form the nucleus of a single EU bank supervisor if the bloc decides to set one up.

The action would speed up law making in these sectors but would leave hands-on supervision entirely within the control of a patchwork of national financial supervisors.

European capitals have already started wrangling about hosting and chairing the committees, even though the bodies may be left powerless for over a year, as the European Parliament seeks guarantees it will not be shut out of the new structure.

“I’m aware of the debate. It is rather obvious that certain countries would be interested in having the headquarters of these committees,” a European Union source said.

The oversight revamp would leave the ECB’s Banking Supervision Committee (BSC) , headed by the Bundesbank’s Edgar Meister, virtually without power in EU banking oversight.

Meister has often said central banks should play a key oversight role as they are responsible for stable financial markets and averting financial crisis and has said Europe needed no new groups as supervisors already cooperated in the BSC.

A spokesman for the ECB declined to comment on the plans.

Karel Lannoo, a supervision expert at the Centre for European Policy Studies think-tank in Brussels, also said the new system lacked an overall body watching financial stability.

No single European group looks at financial health in all three financial sectors — banks, insurers and brokerages — on a European level, increasing chances that large exposures in risky sectors could go unnoticed, he said.

“You want a group of 20 to 25 people looking at financial stability continuously, with solid interaction between supervisors and central banks, with access to all data. But that does not exist,” Lannoo added.

Bad loan write-offs, the faltering economy and sagging shares all had European bank profits bleeding last year, especially in Germany where signs of a credit crunch are emerging. This has raised worries about financial system stability, while insurers also are having a hard time meeting solvency ratios as their investments plummeted.

Even though the groups may entail little more than a secretariat, London and Frankfurt or Bonn have offered to house them, thinking that within a decade they may turn into a single EU bank supervisor, sources close to the discussions say.

But setting up a more federal body is a thought many European policy makers abhor.

The reason is that bailing out a bank is done with taxpayers’ money, and in the absence of collective euro zone tax, it will be the national authorities who put their hands into their pockets to pay for a bank failure.

Still, the wisdom of the EU’s decision to leave financial supervision in national hands despite monetary union could face its first serious test if a bank without a clear national base gets into trouble.

Eyes will then turn to the two new groups for action. But analysts have also said that the ECB could step up its role in case of a crisis and at least act as a referee to see what shares of the cost each country should pay.

The two new rule-making groups will be part of a wider plan to speed up EU law-making decided by finance ministers last year, and will be formed along the lines of the already existing Committee of European Securities Regulators (CESR).

But the European Parliament has not yet consented to the plans that it fears will sap its powers too much. EU sources said this meant the new groups would be effectively without power until such time as the parliament decided to cooperate.

A second set of higher-tier committees that is not yet in place must give any proposal the groups come up with the nod — and establishing that second layer hinges on parliament.

An agreement with Parliament is probable, the sources say, but it may take Europe up to two years more than originally planned to set up the full new rule-making structure — named after its designer, Belgian former banker Alexandre Lamfalussy.

The first key task the two new groups will face is drawing up European rules to implement the new international capital adequacy accord called Basle II. These rules are not needed until sometime next year.—Reuters