WASHINGTON (Reuters) - Federal Reserve Vice Chair Stanley Fischer defended the Fed's approach to the too-big-to-fail issue on Wednesday, telling a conference in Sweden that the central bank's proposals would limit the fallout from a major failure and take taxpayers off the hook.

By ensuring firms have a plan for resolution and a "thick-tranche" of debt to absorb losses, the shock from the failure of any of the United States' 8 globally systemic banking firms would be minimized, Fischer told a banking conference in Sweden. A government liquidity authority and special bankruptcy rules would also make the process run more smoothly than it did when the collapse of Lehman Brothers in 2008 helped touch off a global crisis.

In a crisis, the provision of liquidity from a government fund would not amount to a bailout, he said, since the money would not be injected as capital and any losses would be imposed on other large financial firms. Other rules in process, he said, would ensure against fire sales of derivatives and other financial contracts, Fischer said.

Fischer did not comment on monetary policy or the U.S. economy in prepared remarks released by the Fed. The conference itself, at the Swedish Riksbank, was closed to the press.


(Reporting by Howard Schneider; Editing by Chizu Nomiyama)

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