“I very much support it,” said Davide Serra, a founder of investment fund Algebris, who holds stakes in several financial institutions. “It means that when there is a crisis, there is private capital, generated by them, that they can use.”

Mario Draghi, who heads the powerful Financial Stability Board (FSB), said the board was working on a framework for the orderly resolution of bank failures, which could involve an agency or equivalent authority.

The controversial idea was debated at behind-the-scenes talks during the annual World Economic Forum in Davos as a way to manage crises at large institutions at which trouble could unsettle the broader economic system.

The state of the world economy, and keeping it on a course of recovery, was the focus of the annual forum, which drew to a close yesterday.

The five-day conference saw much spirited debate on whether more regulation is needed for the financial industry, boosting sagging employment and finding ways to ensure the nascent recovery is kept on course this year.

The global banking elite left Davos yesterday battered and bruised by the latest round of the blame game over the world financial crisis.

Scolded by presidents, prime ministers, central bank chiefs and even billionaire investors on regulation and their pay, heads of institutions that dominate financial markets had to admit reform was needed.

US President Barack Obama’s plans to limit the size and activities of banks prompted an urgent call at this year’s forum for new regulations co-ordinated on an international level.

Informal talks showed that while banks and regulators agreed on the need to build shock absorbers and toughen capital rules to curb bank risk, finding a consensus on how to limit the potential cost to taxpayers of emergency bail-outs could lead to critical delays.

“We have to strengthen infrastructure to minimise the fallout of a collapse,” said one. “It is very complex and multidimensional and we have to work a lot.”

Bankers attending the forum said rule makers and the industry had agreed there was a need for a wind-down mechanism for banks, but there was no consensus on what this should look like.

The proposal to set up a bank fund is relevant for small countries with large banks, such as Switzerland, that want to avoid seeing their economy threatened by a financial collapse, as was the case in Iceland. Yet some industry practitioners were sceptical about setting up a fund or entity, which they said would introduce moral hazard by bringing in a stronger safety net for banks.

“If we have a fund based on the contribution of all, maybe we would not trade so carefully because we would have this last-resort money — and then the state,” said the head of the Warsaw Stock Exchange, Ludwik Sobolewski.

Others pointed to the fact that making the fund operational and reliable could take years — time the industry and the broader economy could ill afford.

“It has taken 12 years to build Basel (regulations), but we don’t have 12 years to build financial reform today,” said Dominique Strauss-Kahn, the MD of the International Monetary Fund. “We need to speed up.”

One tricky detail is how to manage such a fund. Many suggested that this delicate task should be carried out nationally, with FSB rules used as “a floor”.

“That specific decision should be taken by each country,” said Brazilian central bank governor Henrique Meirelles.

Speaking on the proposal, Barney Frank, powerful chairman of the US House financial services committee, said: “No one is going to abrogate the independent sovereignty.”

But the industry is still a long way from clarity as the mere notion of what constitutes a potentially risky bank is elusive, and some bankers fear that the political backlash against them may sway the debate.

This year, more top bankers turned up in Davos than last year, when it was too dangerous to risk being seen near a ski slope supping gluhwein and fondue just after being rescued with taxpayer cash.

Some of those who did come this time round kept a low profile. Citigroup CEO Vikram Pandit and Morgan Stanley chairman John Mack were rarely seen around the Davos Congress Centre. New Bank of America CEO Brian Moynihan was more in evidence.

A push by Wall Street banks and some major European peers to fight back against politicians’ attempts to bring in tougher regulations did not get the support of some European commercial banks, which preferred a more conciliatory tone.

“A lot of measures we are suggesting … assume we are able to identify which are the systemically important institutions,” Draghi said. “This is not an easy task.”

Some emphasised that focusing on the size of institutions alone was not the right approach. Israeli central bank governor Stanley Fischer said: “One can imagine firm limits on their size. I tend to prefer differential in capital ratios. Too big to fail is not the right issue. We’re looking for a resolution mechanism.”

Executives in other sectors are concerned about lack of consensus. If the banks and political leaders continue to fight, markets and bank lending might take a further hit, crimping the recovery.

Daniel Vasella, chairman of Swiss pharmaceutical group Novartis, said lack of trust in the system remained his big worry as it posed a “substantial” risk of a double-dip slump. Reuters, Sapa-AFP