British and US banking regulators proposed Monday a joint strategy to ensure that the bankruptcy of big banks won't spark a chain reaction of contagion throughout markets.

The two bodies, acting on behalf of the two largest financial centers in the world, stressed that under the proposals, shareholders and not taxpayers would bear the full costs, and top managers would be sacked.

At the Bank of England, the deputy governor for financial stability Paul Tucker said, "the 'too big to fail' problem simply must be cured. We believe it can be and that this joint paper provides evidence of the serious progress that is being made."

The British and US authorities said in a joint statement that the financial crisis had "driven home the importance of an orderly resolution process for globally active, systemically important, financial institutions," which have foundered.

They said that their solutions, which would target the parent of any finance house in trouble, "have been designed to enable large and complex cross-border firms to be resolved without threatening financial stability and without putting public funds at risk."

They said they had borne in mind work by the G20-backed Financial Stability Board on principles for dealing with failed financial institutions.

There has been widespread criticism of the way in which Lehman Brothers investment bank was closed down, triggering a massive crisis of confidence, and that shareholders did not carry the full brunt of the costs.

In the US and in Europe, governments had to use taxpayers' funds to provide guarantees or new capital to financial institutions in trouble. Creditors lost money but most depositors were protected.

The objective is to minimize the dangers of so-called systemic risk, when a sudden loss of confidence threatens to trigger chaos throughout the financial system as nearly occurred in 2007.

AFP