Banks urged by EU to disclose "toxic products"

BRDO, Slovenia (Reuters) - Banks should step forward with all their problem investments in order to restore confidence in financial markets, the European Union's top financial regulator said on Friday.

"It would give confidence to the market if everybody was pretty certain that all these institutions had all of their toxic products on the table," EU Internal Market Commissioner, Charlie McCreevy told reporters.

"Nobody can say with certainty if all of this is out in the wash at the present time," said McCreevy.

What McCreevy calls toxic products are securitized instruments underpinned by home loans in the United States. As those loans defaulted, the market dried up and their value plunged, forcing many banks to write down billions of dollars in losses.

Banks fear more writedowns are likely and are loath to lend money to each other, thereby prolonging the credit squeeze on the interbank money market.

McCreevy was speaking on the sidelines of a meeting of EU finance ministers and central bankers who were due to sign an agreement to increase cooperation in supervision of the bloc's 40 or so big cross-border banks in times of crisis.

The subprime mortgages crisis has forced the rescue of several second-tier banks such as Britain's Northern Rock NRK.L and IKB IKBG.DE of Germany but fortunately for Europe, there have been no cross-border bank failures yet.

The MOU lays out guidelines on how national supervisors would work together if a cross-border bank gets into trouble as there are no real pan-EU frameworks at present.

"Everybody now knows there is a major potential problem there for cross-border groups," McCreevy said. The MOU does not tackle burden-sharing or how much each country would pay up in a bailout.

German Finance Minister, Peer Steinbrueck, said the MOU was a step forward when there was no political consensus for creating a new, pan-EU oversight body.

"This is a very important first step and perhaps other steps should follow. I don't see just right now the establishment of a common European supervisory authority but nevertheless we have to improve the cooperation and convergence of our supervisory activities on a European level," Steinbrueck told reporters.

POLITICAL IMPULSE

Signing the MOU would give McCreevy the green light to push ahead with introducing "colleges" of national supervisors to oversee the big cross-border banks in times of crisis.

The proposal would be part of a revision later this year of EU laws known as the capital requirements directive or Basel II that oversee how much capital the EU's 8,000 banks must offset against risks on their books.

"We would like to see the ECOFIN ministers giving a broad welcome to go ahead with the idea of a college of supervisors. If they so do we could then be in a position to incorporate within the Capital Requirements Directive amendments which we are due to publish in October," McCreevy said.

"It might be possible to get the changes through the whole system by early next year," McCreevy said.

Belgium's Finance Minister, Didier Reynders, said Belgium had useful experience of supervisory colleges from the way watchdogs from the Netherlands, Belgium and France worked together to oversee Fortis FOR.BR and Dexia (DEXI.BR) banks.

EU ministers are also taking steps to beef up day-to-day supervision of banks, insurers and securities markets.

Ministers have agreed that three groups of regulatory committees that make up the national banking, insurance and securities watchdogs from the 27 EU states, should be given wider mandates to take European rather than purely national considerations into account, the EU official said.

There is also a majority of EU states in favor of the committees having decision-making powers but Britain still fears an erosion of national sovereignty, the EU official said.

(Reporting by Huw Jones, editing by Jan Strupczewski)