The former US congressman who introduced tough reforms to Wall Street after the global financial crisis says China’s spiralling debt levels pose a major threat to the world economy.

Barney Frank, the former chairman of the powerful US House Financial Services Committee, believes that while another Wall Street collapse is “unlikely” but not impossible, China is the much bigger risk.

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“The slowdown there could be a problem. What’s happening in China is, among other things, a very high level of indebtedness and I would say that’s the threat that we see in China,” Mr Frank told the ABC’s AM program.

“It’s not simply a slowdown in growth but a kind of serious cutback because of the heavy indebtedness.”

The rising concerns about a debt-fuelled crisis in China comes almost eight years after the Lehman Brothers collapse triggered the global financial crisis.

However, Mr Frank – co-author of the Dodd-Frank reforms in the wake of the US meltdown – said despite going to the brink in 2008 no financial institution can ever be “too big to fail”.

China’s debt could sink its economy. Photo:AAP

“We have made it much less likely that banks are going to be indebted or any financial institution beyond what they can pay,” Mr Frank said.

“We changed the rules so that if an institution does become so indebted that it cannot pay its debts, it is not kept alive by an infusion that pays the debts.

“It is dead and we do not have a situation where they are too big to fail. They fail.”

As a result, Mr Frank believes moral hazard has been all but eliminated because any federal official taking money from the US Treasury to pay off the debts of an insolvent institution would be violating federal law.

Workers lose on pay while bankers escaped jail

Mr Frank also defended the aftermath of the crisis, which has seen more Americans in lower paid and less secure jobs despite the unemployment rate falling significantly during the economic recovery.

“They’re much better off than they would have been if there had been nothing. I mean it’s very important to resist the temptation to overdo the negative,” Mr Frank said.

“I wish jobs paid more, but people who are making $40,000 to $50,000 a year are better off than if they were making nothing.”

“Very few face prison sentences. Many lost their jobs and yes, I do regret that there was not more criminal prosecution,” Mr Frank said.

“People have said, well, aren’t you disappointed that they have not decided to behave better? Frankly, I never trusted them to behave. This was not a case of oh, okay, now if you bankers will be nicer, we’ll be okay.”

But Mr Frank believes the Wall Street reforms he engineered mean another US financial collapse is unlikely.

“I am confident that they make it substantially less likely,” Mr Frank said.

“I am not at all confident that some new totally unforeseeable developments may come up but, even in that case, the financial institutions today are much more heavily capitalised than they were before,” he concluded.