EU argues over banking watchdogs

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EU ministers have agreed on a framework for improving financial supervision but the 27 member states remain split over what powers new regulators should have.

The financial crisis exposed gaps in cross-border supervision, which meant institutional problems in one country had a knock-on effect on neighbours.

But next week EU leaders will have to consider how much power they want new EU-wide supervisory bodies to have.

The UK is wary of EU regulators encroaching on the City of London.

UK Chancellor Alastair Darling said he was happy with the EU plans "in many respects". But he opposed a proposal to give EU regulators powers over national taxation.

"They might have been able to say to a government 'you've got to do something about a bank', therefore that government would have had to ask its taxpayers to contribute," he said.

The EU finance ministers finally agreed on a text that "makes the point again and again that the powers will not impinge in any way on member states' fiscal responsibilities," Mr Darling said, adding: "that is very, very important".

Structural arguments

The powers of a new European Systemic Risk Board (ESRB) and European System of Financial Supervisors (ESFS) still have to be defined in detail.

The proposals are based on a report presented in February by a high-level panel headed by Jacques de Larosiere, a former IMF managing director. The European Commission has backed the report's recommendations.

The ESRB would be in charge of macro-economic supervision of all financial sectors, its task being to identify systemic risks, so as to prevent another financial meltdown.

The job of the ESFS would be to safeguard stability at the level of individual financial firms.

The Commission, responsible for drafting EU laws, says the president of the European Central Bank should chair the ESRB. But so far there is no EU-wide agreement on that.

A major bone of contention is the influence that the 16-nation eurozone will have in the new bodies.