EU leaders back tougher financial supervision

(BRUSSELS) - EU leaders agreed in principle on Thursday to join the United States in a drive to tighten financial sector supervision in the face of British fears about yielding powers to new European bodies.

European Commission chief Jose Manuel Barroso said that he expected "unanimous" support for the plans to set up three pan-Europe bodies to oversee banks, insurers and securities firms when leaders formally vote on Friday.

"I think I am not exaggerating in saying that there was a very high level of convergence around our proposals," Barroso told journalists after the first day of a two-day summit in Brussels.

"Europe is able to introduce transparent and effective financial supervision. We want to make sure the right institutional network for that," Czech Prime Minister Jan Fischer after chairing the first session.

Diplomats said that the agreement was reached on condition that the new authorities would not have the power to order governments to carry out costly bailouts of stricken financial groups.

London, arguably the biggest financial markets in the world, had been eager to ensure that the new pan-Europe authorities would not be able to stick governments with the bill for propping up failing banks.

"It is only logical that when a supervisory decision would have an impact for the taxpayer that decision should be for the relevant national authority," British Prime Minister Gordon Brown said shortly before the summit got underway.

One diplomat said that the leaders had reached a "balanced" agreement taking into account "the things that are important to the UK".

Another diplomat said that "the British accepted to go ahead (with the plan) on the basis that the new authorities would have strong powers" although they would not be able to order bailouts.

Britain, which is not part of the 16-nation eurozone, also had qualms about plans for a new "European Systemic Risk Board", originally to be chaired by the president of the European Central Bank.

However, a diplomat said that the leaders had dropped reference to the ECB chairing the watchdog in order to ease Britain's concerns.

Following the leaders' backing, it will be up to the European Commission to hammer out the details of the reform in a new set of proposals due later this year, with the aim of implementing them next year.

While proposals to consolidate financial sector regulation in EU bodies have been around for years, governments only started taking them seriously after the crisis late last year exposed the limits of overseeing big cross-border banks with multiple national regulators.

The EU move comes after US President Barack Obama proposed on Wednesday what was billed as the most sweeping regulatory overhaul since the 1930s, aiming to stop future meltdowns and purge the finance system of lax oversight, greed and huge debts.

In particular, the US proposals would give the Federal Reserve expanded powers to oversee regulation on all finance firms or banks that pose a significant systemic risk to the wider financial infrastructure.

As EU leaders focus at the summit on reforming financial sector supervision, concerns are also growing that more needs to be done to tackle massive losses still lurking on the balance sheets of European banks but not yet recognised.

The European Central Bank warned on Monday that eurozone banks might have to take another 283 billion dollars (204 billion euros) in writedowns by the end of 2010, mainly to cover risky loans.

Credit rating agency Standard and Poor's warned on Tuesday that more than half of Europe's biggest banks face the prospect of a downgrade as they struggle to shoulder mounting credit losses.

European Council