BACKGROUND: The EU's plans for financial supervision

Brussels - The European Union wants to reform its financial sector so that it can never again suffer the kind of collapse which it saw in the autumn. EU leaders are set to debate the main ideas for reform at a summit in Brussels on Thursday. If they approve them, they are then expected to task the bloc's executive, the European Commission, with drawing up detailed legal proposals for further debate. RISK ANALYSIS: the summit is set to call for the creation of an EU Systemic Risk Board (ESRB) to analyse possible future large-scale risks to economic stability, such as housing or investment bubbles. The ESRB would be made up of representatives of the central banks of the EU's 27 member states. It would be allowed both to issue warnings of future crashes and propose ways to solve them. Controversy still surrounds the question of who should chair it. Most EU states say that the head of the European Central Bank (ECB) should automatically have the post, but Britain argues that national banks should have the right to appoint someone else if they see fit. FINANCIAL INSTITUTIONS: separately, the summit is set to call for the creation of three EU Supervisory Authorities (ESAs), which would oversee developments in the banking and insurance markets and in European stock exchanges. The ESAs would work with national supervisors to make sure that major individual companies, especially cross-border ones, do not take risks which could lead them to collapse. Controversy surrounds the question of whether the ESAs would have the right to order national governments to bail out at-risk firms. According to EU diplomats, France and Poland are particularly keen to give the ESAs wide-ranging powers, while Britain, which wants to protect London's status as Europe's premier financial centre, opposes giving them too much authority. TOXIC ASSETS: EU officials say that a final key challenge will be to purge European banks of 'toxic' assets whose value has either collapsed in the crisis or become impossible to assess. On Monday, the ECB estimated that banks in the euro zone face further losses of 205 billion euros (284.6 billion dollars) from toxic assets in 2009-10. EU member states are already 'stress testing' their banks to see what level of public funding they might need to survive future economic shocks. Thursday's summit is set to warn governments to 'stay alert' and be ready to help banks recapitalize or 'clean up their balance sheets' - the EU term for buying up their bad assets.