BRUSSELS (Reuters) - Banks must quickly disclose losses on investments hit by a global credit squeeze otherwise governments will intervene if the market fails to sort itself out, European Union leaders were set to agree on Friday.
State-backed sovereign wealth funds -- which have injected capital into banks hurt by huge writedowns -- have played a useful role but should sign up to a code on openness, a draft statement from the two-day summit also said.
"Prompt and full disclosure of exposures to distressed assets and off-balance sheet vehicles and/or losses by banks and other financial institutions is essential," the draft obtained by Reuters said.
"In responding to the turmoil, the European Council agrees that while primary responsibility is with the private sector, authorities in the EU stand ready to take regulatory and supervisory actions where necessary," the document added.
Last August, defaults on the U.S. home loans escalated into a global credit squeeze as banks were wary about lending each other money, fearing they may not get it back.
Trading in complex financial products linked to the defaulted mortgages dried up overnight, sending their value plunging and forcing blue-chip banks like Merrill Lynch MER.N, Citigroup (C.N) and UBS UBSN.VX to write billions of dollars off the value of the products that were typically held off balance sheet.
Policymakers are horrified that eight months after the subprime crisis began unfolding, there is still no clear picture of what other losses will be announced, leaving investors with little appetite to step back into markets.
The crisis has also highlighted flaws in how financial markets are supervised in the 27-nation EU, with a system of national watchdogs despite the EU market being dominated by large cross-border banks.
EU leaders were due to agree to focus on four areas: improving transparency, tightening up how complex financial products are valued when their market dries up, stricter rules on how much capital banks must set aside to cover risk, and reviewing credit ratings agencies.
The leaders were due to back efforts by the International Monetary Fund to thrash out a voluntary code of conduct this year that state-backed sovereign wealth funds would follow.
"The emergence of new players with limited transparency regarding their investment strategy and objectives has raised some concerns relating to non-commercial practices," the draft conclusions said.
Collectively sovereign wealth funds have about $2.5 trillion to spend and EU states like France and Germany worry some funds seek influence over key sectors rather than just profit.
(Additional reporting by Ingrid Melander, editing by Paul Taylor; Editing by Erica Billingham)