BRUSSELS/LONDON - Banks will be more closely scrutinized under European Union plans unveiled on Wednesday to apply lessons from the credit crunch and better protect investors hit by the worst financial crisis in decades.
The European Commission's plans form a core plank of the EU's response to the market debacle. They are aimed at spotting any build-up of risk earlier and avoiding a need for governments again to fork out billions of euros to prop up banks.
Britain, Europe's biggest banking center, has already signaled its unease with the plans, fearing a loss of regulatory sovereignty to new, centralized bodies.
The Commission said the plans were ambitious but realistic and took into account the interests of non-euro as well as euro zone countries.
It's now or never that we build a consensus on financial supervision. I think we will do it, Commission President Jose Manuel Barroso told a news conference.
The Commission's plans are based on a blueprint put forward by former Bank of France governor Jacques de Larosiere and backed in principle by European Union leaders.
They represent an attempt to play regulatory catch-up with a financial market that is already integrated and dominated by cross-border banks like HSBC, BNP Paribas and Santander, even though supervision remains national.
Banks rapidly succumbed to the credit crunch partly because no overall picture existed of how easily instability in one institution could infect others.
The Commission proposed setting up two pan-EU bodies to correct what it sees as gaping regulatory holes.
A European Systemic Risk Council comprising central bankers and national regulators would monitor any build-up of risks and issue a call for action before they become unmanageable.
The European Central Bank would host and chair the council, a step Britain and national banking regulators say gives too much power to the Frankfurt-based institution.
Serious risks to financial stability of a systemic nature were not addressed before the present crisis started, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
In doing so we will be able to ensure we can escape from the boom-bust dynamic that is at the origin of the systemic failure that characterized the functioning of our financial system recently, Almunia said.
Though the council would have no binding power, an EU state would have to explain why it was not taking action.
The body would work with new global risk warning functions being set up by the International Monetary Fund and the Financial Stability Board.
Separately, there would also be a new steering group among three new pan-EU authorities whose job would be to ensure EU rules are applied consistently across the 27-nation bloc.
It would have powers to overrule a member state deemed not complying with common technical standards.
It is important to stress that decisions under this mechanism should not directly impinge on the fiscal responsibilities of member states, EU Internal Market Commissioner Charlie McCreevy said.
Those three new authorities would oversee insurance, banking and securities markets.
The Commission's plans will go to a summit of EU leaders in June for endorsement, and the executive will come forward with draft laws later in the year. It wants the new regulatory system in place by the end of 2010, faster than de Larosiere foresaw.
The European Parliament and EU states will have the final word on the reforms.