A revamp of the financial system needs to be global in nature to prevent a repeat of the worst financial crisis in some 70 years, a top Federal Reserve policy maker said on Monday.

Although the raging crisis appears to be over, our work is not close to being complete. Making sure this work keeps moving forward and is coordinated internationally is hugely important, William Dudley, president of the Federal Reserve Bank of New York said, according to remarks prepared for delivery at the Reserve Bank of Australia's 50th Anniversary Symposium.

Differences in views across countries and regions should not divert the international community from the more important prize -- taking the actions collectively that will ensure a robust and resilient financial system, Dudley said.

He said regulators need to look across the entire financial system and standards must be harmonized across different regions.

Without harmonization, there will inevitably be a 'race to the bottom' and regulatory arbitrage will be encouraged, rather than inhibited, Dudley said.

Regulatory arbitrage refers to a situation in which companies might seek locations for operations or headquarters based on the least restrictive regulatory standards.

Global capital standards should put more emphasis on common equity and establish an overall leverage limit, he said.

The New York Fed chief's comments come as Congress mulls an overhaul of financial regulations.

At the heart of regulatory reform is the question of what to do about firms that are so large that their disorderly collapse could destabilize the global economy, much like the failure of Lehman Brothers did in September 2008.

Dudley said it was crucial to ensure that no firm is too big to fail and stressed the importance of a resolution mechanism that would allow a failing institution to be wound down in an orderly way.

This will require not only domestic legislation, but also intensive work internationally to address a range of legal issues involved in winding down a major global firm, Dudley said.

Briefly addressing the state of the U.S. financial system, Dudley said it was in much better shape than a year ago. U.S. capital markets, with the exception of some securitization markets, are generally open for business, he said.

Smaller U.S. banks, however, are likely to remain under pressure from loan losses for some time to come, he said.

This in turn means that credit availability to households and small businesses will still be curtailed, he said.

(Reporting by Kristina Cooke; Editing by Leslie Adler)

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