UPDATE 2-Canada: Bank "living will" idea gains G20 traction

* Canada wants comprehensive approach on big banks

* "Living wills" would set plans for orderly wind-downs

* Progress expected on mutual assessment process (Adds details)

OTTAWA, Nov 4 (Reuters) - The idea of a "living will" for big, systemically important banks is gaining traction in the G20 as a way to avoid financial meltdowns if there are more Lehmann Brothers-type collapses, Canada said on Wednesday.

Finance ministers and central bankers from the Group of 20 rich and developing nations are also likely to emerge from a meeting in St. Andrews, Scotland, this weekend with a concrete plan for assessing each other's economic policies starting next year -- a first step in a plan to rebalance global growth, a senior Canadian finance official said.

G20 leaders agreed at a summit in Pittsburgh in September to coordinate policies during economic recovery to try to close yawning trade and savings gaps among them, imbalances that they said contributed to the global financial crisis.

Heading into this weekend's meetings, Canadian Finance Minister Jim Flaherty pointed to the potential for "moral hazard" at huge financial institutions.

"We want to make sure that we avoid moral hazard," he said, referring to the possibility that large banks will take risks on the understanding that governments will bail them out if they fail.

"I think we need to be comprehensive in our approach so that we need to talk about not only the larger institutions but also some of the smaller institutions and make sure that we're not creating a two-tiered involvement by government," he said.

The senior Canadian finance official, speaking on condition of anonymity, later said the G20 would likely discuss a range of proposals for dealing with banks deemed "too big to fail" because their failure could bring about the failure of the entire system.

Ideas include a proposal that large banks develop a plan, or "will", approved by regulators, that would lay out an orderly wind-down in case of a life-threatening event.

Other ideas on the table are some form of surcharge for systemically important banks, or more intense regulatory supervision, he said.

He also said it was important that G7 countries with large deficits to start planning how they will return to fiscal health.

However, he said the recovery process remains fragile and now was too soon to start unwinding economic stimulus measures. (Reporting by Louise Egan; editing by Peter Galloway)