A global regime for shutting down failing banks should be created that would force shareholders, lenders and creditors to bear the costs, with the broader industry, rather than taxpayers, footing any remaining bills, the main international banking body said on Monday.

In two reports on systemic risk and bank failures, the Institute of International Finance urged the leaders of the Group of 20 nations to create a working group to put together procedures and rules for cross-border bank failures.

“It is absolutely fundamental to the operation of the industry that you have a mechanism by which a participant can exit. It took the crisis to reveal to the industry and policymakers that we didn’t know what to do if things went bad,” said Peter Sands, Standard Chartered chief executive and chairman of the IIF’s special committee on effective regulation.

The IIF proposes creating international standards for forcing debtholders and unsecured creditors to share in the costs of a bank failure, perhaps through debt for equity swaps or a specific reduction in the amount of debt to be repaid.

The lobby group, which represents more than 400 of the world’s largest banks and insurers, also recommends that the industry picks up the remaining costs through a post facto levy.

Urs Rohner, the Credit Suisse vice-chairman who headed the group that did work on cross-border failures, said his group decided an after-the-fact payment was preferable because the existence of a prepaid fund would put pressure on regulators to save rather than shut down troubled banks.

Mr Rohner told the Financial Times he believed that if such a system had been in place, the contagion from Lehman Brothers’s failure could have been avoided. “Everybody underestimated the rapidity with which you need to be able to act. When trust goes down you have no time. Unless you have a system in place you will fail,” he said.

Mr Sands said any cross-border framework should also allow banking regulators to intervene earlier in a budding crisis, including the power to remove senior management and transfer parts of a failing business to other ownership.

The leaders of the Group of 20 nations agreed last year to try to work towards an international regime for resolving failed systemic banks, and the finance ministers reiterated that call last month, adding that they expected a progress report in June.

The Basel Committee on Banking Supervision, which sets global standards for banks, has also been studying the issue of multinational bank failures with an eye to improved cross-border co-operation. But it noted that “broad international agreement on such mechanisms appears unlikely in the short term.”

The IIF also issued a second report on systemic risk, which argues that stricter supervision, rather than breaking up banks, is the best way to prevent a recurrence of the crisis. “Better rules are clearly part of the answer, but just as important is strengthened supervision,” Mr Sands said.

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