FRANKFURT (Reuters) - Deutsche Bank (>> Deutsche Bank AG) co-Chief Executive Anshu Jain brushed aside concerns that Germany's flagship lender posed a risk to the financial system just because of its size, and urged regulators to create a mechanism for winding down failing banks.

"I'm not sure it has anything to do with size at all," Jain said in response to a question about whether large banks posed a greater danger to the economy than smaller lenders.

Speaking at a panel discussion organised by Germany's Green party in Frankfurt on Tuesday, Jain said a priority was to create a legal and regulatory framework that allows for the orderly winding down of even small failing banks.

"The point is that we are not letting any financial institutions fail right now. The U.S. is ahead of us in that aspect," Jain said, pointing out that relatively small lenders like Spain's Bankia (>> Bankia SA) or Laiki Bank (>> Cyprus Popular Bank Public Co Ltd) were rescued.

"When a middle sized Spanish bank is threatened by a flight of deposits, what happens? All of Europe runs," Jain told the audience.

Andy Haldane, Bank of England policymaker in charge of financial stability, said the problem of how to wind down a failing bank remained unresolved.

"Have you ever seen a bank with the balance sheet the size of a G7 country fail? There is a jolly good reason why not," Haldane said, adding politicians would rather pay for a bailout than risk causing a major fallout which messes up the economy.

Bank safety remains heavily dependent on mathematical models designed by each bank to forecast market risk, Haldane added.

These risk models have proven vulnerable to flaws or have been deliberately tweaked to artificially lower the way risks are represented for accounting purposes, Haldane said.

Even the creation of new financial debt instruments which can be converted into bank equity has not solved the problem of having banks which are too big to fail, he said.

"Talk of bailing in creditors is all good stuff but I am sceptical if this is sufficient," Haldane told the audience.

He said, from a regulatory point of view, the only way to make the banking system safer was to introduce lower leverage ratios and greater equity.

"The grand bargain is that you put in greater insurance and we will back off," Haldane said, referring to the level of regulatory scrutiny.

(Reporting by Edward Taylor; Editing by Mark Potter)