(BRUSSELS) - The European Commission called on Wednesday for a coordinated European Union response to a crisis ravaging the financial sector as it proposed tougher regulations and cross-border oversight.

With confidence in financial markets at rock bottom, commission chief Jose Manuel Barroso assured: "Our system can cope, the European financial system has the ability to respond."

However, he stressed that the European Union needed "to inject credibility in the European response, and that is why we are asking and urging member states for closer cooperation."

His appeal came as Europe's four biggest economic powers -- Britain, France, Germany and Italy -- prepared to meet on Saturday in Paris for talks on the global financial crisis.

The meeting, where leaders are to hammer out concrete actions, would set the stage for a full summit attended by all EU leaders in Brussels on October 15 and 16.

The EU commission chief said Europe's response to the crisis should be stronger supervisory authorities and changes to accounting rules especially for the valuation of securities at the root of the current problems.

He also called for reforms to improve the consistency of deposit guarantee schemes in Europe, more transparency for executive pay packages and for structural reforms to be continued.

Separate from those emergency initiatives, the commission issued proposals to shake up banking sector regulations and oversight under a reform that has been in the works since long before the most recent turmoil.

Under the proposals, banks would have to limit their dependence on lending and borrowing in the interbank market in order to restrict their exposure to other banks.

The new rules would also require institutions that originate loans to retain exposure to them when they re-package pools of loans as tradable securities that are sold on to investors.

Such so-called securitised products have been blamed for being at the root of the current crisis because many banks originating loans in the United States sold them on without bearing risks for the underlying loans, many of which are now going sour.

The commission also called for a college of supervisors to be set up to oversee big cross-border banks in the face of opposition from member states for an EU banking watchdog to be created.

European financial regulators have failed to keep up with the waves of cross-border consolidation in the banking industry sector in recent years, leaving banks largely supervised along national lines.

"These new rules will fundamentally strengthen the regulatory framework for EU banks and the financial system," said EU Internal Market Commissioner Charlie McCreevy.

"I believe that they are a sensible and proportionate response to the financial turmoil we are experiencing," he added. "Basic rigour, transparency and prudence are key to a healthy and stable banking system."

The proposed rules will have to be approved by EU member states and the European Parliament in order to take effect.

Capital Requirements Directive - briefing

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