More cross-border consolidation and less severe regulation is needed if the EU financial sector is to achieve its full potential, said Charlie McCreevy, Ireland's EU Commissioner.

Speaking yesterday at the Central Bank of Ireland, Mr McCreevy said obstacles to cross-border consolidation are stifling competition and innovation.

"The EU financial sector has not yet realised its full potential," he said. "It can and must become more efficient, more competitive. To achieve that, further cross-border consolidation is needed."

Mr McCreevy said he sees no reason why an institution that has the right to operate in one EU country cannot expand into another. He said he knew of companies that had failed in their attempts to engage in cross-border mergers because of the complexity of the approval process, the misuse of supervisory powers and the risks of political interference.

These rules "stand in the way of institutions seeking greater economies of scale and that means they limit their competitiveness," he said, adding that this competitiveness is essential to help the EU compete with global markets.

Mr McCreevy urged the governments of the EU member states to resist creating unnecessary regulation. Instead they need to strike a balance between investor protection and the need for competitiveness and innovation.

"I will not be adopting a scatter-gunned approach," he said, proposing that specific regulation be introduced for areas such as consumer credit, mortgages and asset management, where harmonisation is both necessary and feasible.

"What we do will be cautious and well-targeted, with the intention of delivering benefits to both consumers and businesses."