European leaders have agreed to principles for regulatory reform in the region at the European Union Council meeting in Brussels over the past two days.

Following the meeting, the Council noted that “the operating environment of the financial institutions remains challenging and credit flows continue to be constrained. Governments must therefore stay alert to possible further measures, which may be needed to recapitalize or to clean up balance sheets.”

Looking ahead to broader reforms, they also agreed that the financial crisis demonstrates the need to improve the regulation and supervision of financial institutions, both to prevent future crises and to help restore confidence in the markets.

Among other things, the Council said that it supports the creation of a European systemic risk board, which will monitor and assess potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action. It also recommends that a European system of financial supervisors, comprising three new supervisory authorities, be established to upgrade the quality and consistency of national supervision, strengthen oversight of cross border groups and establish a European single rulebook applicable to all financial institutions.

Additionally, it calls for further progress to be made in the regulation of alternative investment funds, the role and responsibilities of depositaries and on transparency and stability of derivatives markets. And it calls on the European Commission and national governments to accelerate their work on countering the procyclical effects of regulatory standards, and to deal with executive pay and remuneration in the financial sector.