Britain will hold out for firm assurances at a European Union summit on Thursday that a drive for pan-EU banking supervision will not further weaken national powers to regulate its huge financial industry, diplomats said.
The 27-nation bloc wants to ensure it is better prepared for any repeat of the global financial crisis which was triggered by bad loans in the United States and spread quickly through the world's economies, pushing many into recession.
But Britain fears that three pan-EU watchdogs to be created next year could force countries to pick up the tab for banks that collapse on their watch.
Smaller countries such as Slovenia, Slovakia and Romania share Britain's concerns, diplomats said, adding that Germany was keen for clarification of the matter.
Nonetheless opposition from London and elsewhere will do little to weaken enforcement of the bulk of new EU rules, covering everything from hedge fund supervision to banker's pay.
The new watchdogs will monitor countries to make sure that they introduce the new rules.
"There are some who think we (the EU) are going too far, too fast," said a Czech official, whose country is the current EU president and will seek to broker agreement at the summit, due to end on Friday. "But we are on a good path for a decision to be taken."
Diplomats said, however, it was possible EU leaders would not fully settle all outstanding points on financial regulation and could continue the debate at an EU summit in October.
EU finance ministers this month agreed that any decisions taken by the new EU bodies "should not impinge on the fiscal responsibilities of the member states" — reflecting concerns that remote authorities could force countries into bailing out troubled banks, for example.
Diplomats said British Prime Minister Gordon Brown would call for that phrase to be included in the final summit declaration, and if possible made more explicit.
Britain fears a scenario in which its national regulator spotted a severely under-capitalised bank among the 600-plus financial institutions operating in the City of London, only to see its concerns over-ruled by the EU agency.
If that bank then failed, it could face expensive compensation claims from depositors who lost money.
The EU proposals are already a watering-down of ideas initially floated and have disappointed those who wanted the EU to spearhead a global drive for tough, cross-border supervision.
U.S. President Barack Obama is due to announce on Wednesday an overhaul of U.S. financial regulation, with one U.S. official saying it would involve putting the U.S. Federal Reserve in charge of monitoring big-picture economic risks.
The EU also plans to create a European Systemic Risk Board that would monitor any build-up of risks in the financial system that would threaten its stability.
Britain resists proposals for the president of the European Central Bank — currently Jean-Claude Trichet — to chair this body, saying it would be happier with a rotating or neutral chair.
Defaults in U.S. subprime mortgages in 2007 marked the start of a global banking crisis largely blamed on slack regulation and which triggered the worldwide economic slowdown.
While some analysts see signs of recovery, the impact on the global economy is still being felt.
Data on Wednesday showed British unemployment at a 12-year-high of 7.2 percent in April. In France, tyre maker Michelin announced a plan for 1,903 voluntary job cuts.
