WASHINGTON - The systemic risk posed by large, complex financial institutions resulting from a rash of mergers concerns international regulators, according to a report released in London on Thursday.

The report, commissioned by the G-10 governments in September 1999, says that these behemoths are more interdependent because of a surge in interbank lending and derivatives contracts, as well as the globalization of markets. If a crisis struck, unwinding one of these banks could be "difficult" and "disorderly," Federal Reserve Board Vice Chairman Roger W. Ferguson Jr. said in London. Regulators are already at work on "contingency planning for working out a large and complex financial institution," he said.

The report notes that the most complex bank liquidation in the United States was of the $23 billion-asset Bank of New England in 1991 and that the largest U.S. banks now have more than $700 billion of assets.

The regulators agree that they need to improve crisis prevention and management through additional communication and cooperation, and that it is important to act promptly to deter a crisis.

The report makes no specific recommendation, but it does applaud "prompt corrective action" systems, like that in the United States, where regulators take increasingly severe action against a bank as its capital declines.

Creating a global early-intervention program would require consistent capital standards, and the report supports widespread adoption of risk-based standards, such as those being written by the Basel Committee on Bank Supervision. "Capital standards provide an anchor for virtually all other supervisory and regulatory actions," the report says. "Early intervention policies triggered by more accurate capital standards could prove to be important in crisis prevention."

If taxpayer dollars are used in a bank rescue, as the report says is increasingly probable, cross-border consolidation may "require the development of cost-sharing arrangements among governments, and additional policies and procedures to minimize moral hazard incentives."

Market discipline should also be sharpened through augmented disclosures and improved risk management practices and accounting conventions, according to the report.

The findings of the report, which was designed to analyze the impact of consolidation on financial risk, monetary policy, competition, credit flows, and payment and settlement systems, are sometimes difficult to identify. "The potential effects of financial consolidation on the risk of individual financial institutions are mixed, and the net result impossible to generalize," is representative of its 463 pages.

It is clear the authors had to satisfy regulators from 13 countries, and pains are taken to point out both sides of an issue. For instance, consolidation is praised as a way to diversify risk, but it's also noted that some merged firms shift to riskier assets, which increases operational hazards and makes management's job harder.

Mr. Ferguson praised the report as "an important demonstration that the thinking of policymakers and the public policies they determine and administer are evolving along with the financial system."

The countries included in the study were Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

According to the report, there were 7,304 mergers valued at $1.62 trillion among banks, securities firms, and insurance companies in those countries from 1990 through 1999. "Acquisitions of banking firms accounted for 60% of all financial mergers and 70% of the value of these mergers," it said.

Merger activity picked up in 1997, surged in 1998, and was lower but still strong in 1999. Most deals were intracountry, and most involved companies in the same business. The largest type of mergers, at 2,911, was U.S. banks buying other U.S. banks.

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