UPDATE 1-ECB bond plan eased market tension, risks remain-ESRB

FRANKFURT, Sept 20 (Reuters) - The European Central Bank's decision to launch a new and potentially unlimited bond purchase programme has helped ease tension in financial markets, the European System Risk Board (ESRB) said on Thursday.

The body, designed to give early warnings and one of Europe's flagship responses to the financial crisis, added that markets remained vulnerable to policy and implementation setbacks and to further market fragmentation.

Since its June meeting, "financial market tensions have subsided somewhat, also owing to recent decisions taken by the ECB," the ESRB said in a statement, adding that it was crucial to implement agreed measures to restore confidence.

"First and foremost, it is the responsibility of national governments to consolidate fiscal positions and implement structural reforms credibly and sustainably," the ESRB said.

"The credibility of these policies must not come to be seen as in doubt; complacency is to be avoided."

The ESRB also discussed the recent Libor interest rate-rigging scandal and said governance and setting mechanisms of financial market reference rates needed to be reformed.

"The General Board's discussions focused, in particular, on how to rebuild confidence in the integrity of such instruments, on whether, in the future, reference benchmarks should better reflect changes in bank funding structures, and on how to ensure a smooth transition should regulatory reforms be initiated," it said.

The world's top central banks have agreed to set up a joint body to look into Libor interest rates.

The ESRB is made up of a mix of central bankers and financial industry bodies and is designed to take a bird's eye view of Europe's economy and to flag up any emerging problems for relevant authorities to act on.

Critics argue it has no formal teeth and is therefore likely to prove ineffective. The ESRB argues, however, that its ability to issue public warnings gives it the ability to harness the disciplinary forces of the market. (Reporting By Eva Kuehnen; Editing by Susan Fenton)