City banking partners have welcomed plans to usher in centralised supervision of Europe's biggest banks announced yesterday (13 December) but warned that increased regulation could have a negative impact on liquidity.

European finance ministers yesterday agreed to hand over nations' individual responsibility for bank regulation to the European Central Bank (ECB) in Frankfurt, which will supervise up to 200 of Europe's largest banks. It should pave the way for direct recapitalisation of struggling banks by the European Stability Mechanism rescue fund.

The change, seen as the first step towards a eurozone banking union, will apply to European banks with assets of more than €30bn (£24.3bn) and are expected to take effect from March 2014. Smaller banks will continue to be supervised at a national level. The UK, Sweden and some other countries outside the eurozone will not fall under the single regulator but have won powers to influence some decisions.

While City lawyers are in broad support of the proposed regulations, some have expressed concern that it could further paralyse liquidity in a stagnant transactional market.

Allen & Overy finance partner Trevor Borthwick said: "While this is interesting, there is a risk that another level of regulation will affect credit flows. The response to the financial crisis has been a lot of regulation but you have to wonder whether the unintended consequence of that is an adverse effect on liquidity.

"Regulation is not the wrong way to go but it needs to be carefully measured particularly when you're talking about such wide-scale regulation such as this. There are questions over whether the non-bank credit intermediation will be able to fill the funding gap being left by banks as a result."

Herbert Smith Freehills EMEA finance head or Malcolm Hitching (pictured) said: "This is a really interesting move on the part of the ECB and you can fully understand the political drivers behind the decision. It is too early to predict what the practical impact will be, but it is likely to result in increased regulation and thus more questions and issues will come through from banks needing advice.

"Law firms will want to get their teeth into the issues pretty quickly to ensure they are able to advise on market movements, and that will require an even more coordinated approach between firms' European regulatory and financial institution group teams. I don't know whether this is going to improve or enhance liquidity in the banking markets but I suspect that this may still be a long time coming."

This week's Brussels summit has also seen European leaders agree to release a €34.4bn (£27.9bn) tranche of aid, delayed since June, to Greece. However detailed plans on wider economic integration are not set to be put forward until June next year.