EU faces acid test on financial supervision reform

By Huw Jones

BRUSSELS (Reuters) - European Union policymakers face their first acid test next week on whether they can follow up on their own demands for an overhaul of financial supervision seen wanting in the credit crunch.

The European Parliament's economic affairs committee and EU finance ministers are separately scheduled to decide on a reform of the 27-nation bloc's insurance industry on Tuesday.

Solvency II aims for big cross-border insurers such as Generali, Prudential, Allianz and Axa to set aside capital more efficiently to cover risk and better protect policyholders.

"This is a good political test of willingness of governments to face up to the current financial crisis," said Peter Skinner, the British socialist steering the overhaul through parliament.

"If we move it away from the front burner, we will end up with egg on our face. Parliament stands ready to deliver a document which we believe could offer a robust system of regulation of insurers," Skinner said.

Financial supervision in the EU is still based along national lines despite huge strides in integration but many governments, central banks and lawmakers say it can be too slow and cumbersome in a crisis like the one roiling markets now.

"I think there is broadly a majority view towards getting a consensus," said Sharon Bowles, of the assembly's Liberal bloc.

The reform is proving controversial as it erodes national regulatory sovereignty.