The report's authors want to avoid a repeat of the financial crisis
The City of London and other financial institutions should be supervised by a new pan-European risk watchdog, a European Commission report recommends.
Its proposals, written by ex-Bank of France Governor Jacques de Larosiere, include an EU-wide scheme to oversee risks and give early warnings.
Supporters say the banking system crosses too many borders for national supervision to function.
But the UK government will wait to see the details before responding.
Mr de Larosiere told a news conference that the 68-page report ran to 66 recommendations.
The recommendations include:
- Credit rating agencies should be supervised by new European Securities Authority
- There should be a new body called "the European Systemic Risk Council" and chaired by the president of the European Central Bank. "Its role will be to gather information on all macroprudential risks in the EU," the report says
- Sanctions and supervisory powers should be strengthened throughout the EU - "so sanctions bite and are deterrent".
Mr de Larosiere said that the report proposed that domestic banks should largely continue to be supervised by national supervisors, but in some important cases, involving cross-border institutions, it would not be effective enough.
European Commission President Jose Manuel Barroso stressed the need for urgent reform, saying: "In advance of broader proposals on supervision later in the year, the Commission will present detailed concrete proposals during April on private equity, hedge funds and then on remuneration schemes."
The independent group was set up by Mr Barroso in November to look at ways of improving supervision of the financial sector.
It followed criticism that Europe's response to the credit crunch and the crisis in the financial sector was too nation-based and needed more EU involvement, possibly via the European Central Bank.
The report's call for a pan-European watchdog has attracted the most attention. Its aim would be to give an early warning of the kind of mistakes that led to the financial crisis.
Robert Wardle, a consultant to DLA Piper law firm and ex-head of the SFO, said: "My immediate reaction to this report is that this is a good example of how regulation is becoming increasingly international."
"The use of any organisation such as this is measured in its bark and bite... We need to see what teeth this Council is given and how it will fit into the complicated, and often overlapping, system of existing national regulatory bodies."
BBC Europe Editor Mark Mardell says supporters of the scheme would like to see national bodies such as the UK's Financial Services Authority (FSA) made subordinate to the new institution.
Our editor adds that Prime Minister Gordon Brown has relaxed his previous opposition to tighter regulation at a European level, but the government will wait to see the level of supervision recommended before giving its response.