By Eva Taylor and Andreas Framke

FRANKFURT (Reuters) - Five years after the collapse of Lehman Brothers, the European financial system is still not equipped to cope with a bank failure of a similar magnitude, Bundesbank board member Andreas Dombret told Reuters.

The bankruptcy of U.S. investment bank Lehman in September 2008 plunged the global financial system into crisis, leading to a raft of new rules aimed at making banks' business less risky to avoid taxpayer-funded rescues.

Some progress had been made and the system is now safer than in 2008, but implementation is slow, Dombret, who is in charge of the financial stability portfolio on the German central bank's board, told Reuters in an interview published on Friday.

"If we had a Lehman 2.0 tomorrow, which I don't see, we still wouldn't hold the tools we designed to wind down banks globally effectively in our hands," Dombret said.

It was too early to give the all clear, because the root of the crisis had still not been addressed, he said.

"More than anything, we have bought time with a number of unconventional measures. That's why financial markets are currently calm, but it doesn't have to stay like that forever."

The European Central Bank's vow a year ago to do "whatever it takes" to preserve the single currency, the euro, took some heat out of the debt crisis, but it also eased pressure on struggling euro zone countries to reform.

As a result, Dombret singled out the European sovereign debt crisis as the main risk to financial stability.

The link between troubled banks and indebted governments was still too strong, he said. A banking union project aims to address this, but Dombret also reiterated the Bundesbank's plea to back banks' sovereign debt holdings with sufficient capital.

Such holdings are still treated as risk-free investments in the global regulatory framework, called Basel III.

He also warned that low interest rates could lead to asset bubbles, as seen in the past, but added that he saw no risk of that happening so far in Germany.

Dombret's comments come as world leaders are set to meet under the G20 umbrella group on September 5-6 in Russia, where they are expected to reiterate their pledge to implement the new global rules for banks - the Basel III framework.

Banks are coming under pressure in Britain, the United States and Switzerland to comply earlier with some Basel III elements, in particular the leverage ratio, the limit on balance sheet size relative to capital held.

Dombret warned against overestimating the leverage ratio.

"It is impossible to regulate a complex game with a single rule. That would be neither just nor fair. The significance of the leverage ratio is limited. I still believe in the basic principle of risk weighting," he said.

NOT ENTIRELY HAPPY

Dombret was in charge of Bank of America's <BAC.N> business in Germany, Austria and Switzerland at the time Lehman collapsed and he said since then, a lot had improved in the industry.

Banks had started to build up their capital buffers and to cut down on leverage, the market had become more transparent and the mentality of bankers and regulators alike had changed, becoming more risk-aware.

Nonetheless, he said he was not satisfied with the progress on efforts to get banks under control that are too big to fail without disrupting the financial system, as Lehman did. The shockwave could be felt across the globe.

"I'm not entirely happy with the implementation of the already agreed regulatory measures. There is no room for complacency," Dombret said.

It was key now to establish a single mechanism to wind down non-viable banks and in the euro zone such a system should be in place when the single bank supervisor under the roof of the ECB starts operating next year, Dombret said.

"Otherwise there won't be a credible threat of force at the start of the banking union," he said, adding that a new European institution should take on the task eventually and until such a body was in place, an interim solution had to be found.

(Reporting by Eva Taylor and Andreas Framke Editing by Jeremy Gaunt)