As G20 leaders convene in the USA this week, the European Commission has announced its plans to create a tougher financial regulation framework for EU member states. "This European system can also inspire a global one and we will argue for that in Pittsburgh," European Commission President Jose Manuel Barroso said.

The EU proposals call for the creation of a banking super-regulator, The European System of Financial Supervisors (ESFS), which would be composed of national supervisors from each member state. Separately, the proposal suggests the creation of a European Systemic Risk Board (ESRB) to identify risks for the European financial system and to make recommendations to individual countries about what to do. There are concerns, however, about the ESRB's apparent lack of teeth and its relaince on "moral suasion and peer pressure".

Nevertheless the EU's Internal Market Commissioner Charlie McCreevy was particularly upbeat about the proposals. "This package represents rapid and robust action by the Commission to remedy shortcomings in European financial supervision and will help prevent future financial crises," said McCreevy.

Despite the touting of Bank of England governor, Mervyn King as the new body's vice-chairman, the proposals will be be particularly challenging for the naturally Euro-sceptic City. The UK's backing is seen as essential if the proposed legislation is to hit its operational dealine of end 2010. Lord Myners, the City Minister, has made robust representations to the Commission in recent weeks over proposed EU hedge fund regulations. Speaking to The Times this week Myners said: “The UK is playing a vital leadership role in the reform of global banking regulation. We will continue to push for real reform at the domestic, European, and international levels including at the G20 summit in Pittsburgh."

“We have called for legislative proposals to establish the European System of Financial Supervisors and European Systemic Risk Board. We will study the proposals carefully. Our goal in negotiations in the months ahead will be to ensure that the final proposals align with the Council's instructions in June.”