By Lauren Tara LaCapra

(Reuters) - The problem of some banks being "too big to fail" remains because global regulators have not come up with a coordinated way to wind them down without causing market-wide disruptions, a senior Morgan Stanley <MS. N> executive said on Tuesday.

Colm Kelleher, head of Morgan Stanley's institutional securities business, said that while the system is safer now than it was at the peak of the financial crisis in 2008, competing regulatory agendas in Europe, the UK and the United States have hampered progress. Because global banks are large and interconnected - through short-term loans and derivatives contracts, for instance - one bank getting into trouble could still have wide-ranging effects, he said.

"The biggest issue has not been resolved, which is 'too big to fail,'" Kelleher said at a Bloomberg Markets conference. "And too big to fail cannot be resolved until you have an effective resolution mechanism. And you cannot have an effective resolution mechanism when you have different regulatory agendas."

The term "too big to fail" refers to banks and financial firms that are considered so large or entwined in the markets that their individual failures might cause a systemic crisis. It is often linked to the 2008 bank bailout program that put $700 billion worth of U. S. taxpayer money at risk to rescue faltering financial firms including Morgan Stanley.

Kelleher, who was speaking on a panel about whether the financial system is safer five years after Lehman Brothers' bankruptcy, said regulators "haven't addressed the root issues" that would prevent another crisis. In particular, regulators around the globe should have the ability to dismantle a bank the way the Federal Deposit Insurance Corporation handles bank failures in the United States, he said.

In addition to the FDIC's resolution authority, big U. S. banks are now required to construct "living wills" that detail how they would be liquidated if they were to fail. But that rule is not implemented globally, and Kelleher told reporters that living wills would not prevent a crisis because they do not address the domino effect that would occur in financial markets if a large bank were to fail.

(Reporting by Lauren Tara LaCapra; Editing by Lisa Von Ahn and Leslie Gevirtz)


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