Germany sparks row over bank watchdog

Britain will lose out to Germany in its bid to host a new European banking watchdog because of its failure to join the euro, says a senior EU official.

Ernst Welteke, the head of the German central bank, yesterday said the watchdog should be sited in Frankfurt rather than London.

"It is not certain Great Britain will ever join the eurozone," Mr Welteke said. "We need closer supervisory co-operation in the monetary union. That is why London is not an option at the moment."

The comments are certain to anger the Government, coming so close to the deadline for Gordon Brown to deliver his verdict on the five economic tests for euro membership.

A Treasury spokesman last night said the committees would provide technical advice on single market directives and a forum for co-operation on supervision. "Both are matters for the member states [of the EU] and not just those in the euro area," he said.

A decision on where to locate the three new regulators – for securities, banking and insurance – is the subject of intense haggling between the main European powers. The securities watchdog has already gone to France and there is speculation that London and Frankfurt are both candidates for the banking and insurance regulators.

Mr Welteke said it would be "natural" to house the banking committee in Frankfurt because of the potential for synergies with the European Central Bank over supervision.

However, some observers pointed out that Mr Welteke, who sits on the ECB's governing council, was probably reflecting resistance from within the ECB to remove supervision from the central bank.

Meanwhile, Mr Brown stuck to his line that the decision on whether to join the euro would be based on the result of the economic tests that would be announced before the end of the first week in June.