EU proposes tougher banking rules

Under the proposed shake-up, banks would have to limit their dependence on lending and borrowing in the interbank market in order to restrict their exposure to other banks.

The new rules would also require institutions that originate loans to retain a certain percentage of capital when they re-package them as tradable securities that are sold on to investors.

Such so-called securitized products have been blamed for being at the root of the current crisis because many banks originating loans in the United States sold them on without bearing risks for the underlying loans, many of which are now going sour.

The commission also called for a college of supervisors to be set up to oversee big cross-border banks in the face of opposition from member states for an EU banking watchdog to be created.

"These new rules will fundamentally strengthen the regulatory framework for EU banks and the financial system," said EU Internal Market Commissioner Charlie McCreevy.

"I believe that they are a sensible and proportionate response to the financial turmoil we are experiencing," he added. Basic rigor, transparency and prudence are key to a healthy and stable banking system."

The proposed rules will have to be approved by EU member states and the European Parliament in order to take effect.