More action needed to end 'too big to fail'

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More needs to be done to combat the banking sector's "too big to fail" problem, which still poses a risk to global finance and the economy, a report by the Financial Stability Board (FSB) said on Monday.

Further legislation, regulation and international cooperation is necessary to address the moral hazard posed by banks or other institutions that are so big they cannot fail without damaging the broader financial sector or the economy, the Switzerland-based FSB said.

In a report published ahead of the G-20 summit on September 5 and 6, the FSB recognized that some progress had been made in addressing the issue – in particular, by boosting banks' capital requirements and strengthening their infrastructure. But the body, which was established to co-ordinate a regulatory response to the world's worst financial crisis since the Great Depression, stressed "the job is not finished."

(Read more: What the G20 Need to Talk About This Week)

Systemically important financial institutions (SIFI) are those whose size and interconnectedness mean their collapse would cause such serious damage that governments have no option but to bail them out. This became problematic as the financial crisis took hold in 2008, when numerous banks were given state support, including Citigroup and Bank of America in the U.S. and Lloyds Banking Group and Royal Bank of Scotland in the U.K.

The FSB said that in order to avoid a repeat of this, G-20 countries needed to commit to legislative reforms, and work to remove obstacles to cross-border co-operation. It added that renewed support from the world's major economies was "vital" to address the issue.

(Read more: We Haven't Solved 'Too Big to Fail': BoE's Haldane)

FSB Chairman and Bank of England Governor Mark Carney said the initiative to end the "too big to fail" problem was "ambitious, but essential".

"While much has been accomplished over the past few years, more needs to be done," he said in a news release. "In particular, jurisdictions need to implement fully the internationally agreed policies through additional legislation and regulation; cross border co-operation agreements must be struck, and policies for gone concern loss absorbing capacity should be developed."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop