The world’s leading banking groups issued a vocal call last night for finance ministers and central bank governors to take rapid and coordinated action to restore confidence and market calm at next week’s meeting of the Group of Seven leading economies.

The Institute of International Finance (IIF), the global association of financial groups, sounded a warning in a letter to the ministers and governors that the threat to the world economy from the still-deepening credit crunch has become “critical” and called for “decisive leadership” from the G7.

“While financial markets have become somewhat calmer most recently, considerable risks remain and these call for urgent action,” Charles Dallara, the IIF’s managing director said in the letter.

He highlighted the danger that with credit markets still under severe stress, “weakening economic activity and deterioration of financial market conditions, particularly in the US, will feed on each other, potentially causing a downward spiral with serious adverse consequences for the global economy”.

With these risks growing, Mr Dallara said that “the range of options available to policy-makers in becoming narrower and the required response time shorter”.

The IIF’s call to arms came as its 375 members from among the world’s most important banks, prepare to release their own report next week on the root causes of, and remedies for, the credit crunch. The report is expected to expand on previous admissions of culpability by leading banks, and set out measures for how institutions will work to prevent any repeat of the present crisis.

Mr Dallara said central banks needed to keep pumping extra liquidity into strained financial markets and remain flexible.

As the G7 and its Basle-based Financial Stabilty Forum continue to work on proposals for tackling the crisis, including potentially far-reaching taxpayer-funded moves to stem market stresses, the IIF said the arguments for such action were growing. “There is a growing case for finely calibrated public intervention,” Mr Dallara said.

The FSF, composed of top officials from finance ministries, central banks and regulators, is finalising a report to the G7 that will make detailed recommendations on how to curb the credit crisis.

Leaked drafts of that report show that options under examination include radical action such as using public funds to buy-up or make long-term loans against the hard-to-trade and devalued asset-backed securities blamed for the present seizure in money markets.

There may also be moves to organize simultaneous disclosure by banks on an agreed and comparable basis of their exposure to hard-to-trade asset-backed securities.

Even more far reaching action being considered could point to governments ultimately being obliged to inject public funds directly into troubled banks to recapitalise the system, or finessing mergers between banking groups.

Yesterday Christine Lagarde, the French Finance Minister emphasised the need for close coordination between G7 members if next week’s talks are to help lead the world out of the present crisis.

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