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UPDATE 1-Fed's Bullard-Banks should be smaller to manage failure

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(Adds background) By Alister Bull

ST. LOUIS, Oct 11 (Reuters) - Big U.S. banks should becomesmaller to make any failure more manageable, a senior FederalReserve official said on Thursday, supporting a suggestion thatthe size of banks be limited to a specific percentage of U.S.gross domestic product.

"I'm very much of a view that 'too-big-to-fail' remainsalive and well and the only way to really make progress on thisissue is to get firms down to a smaller size where you'd feelcomfortable letting them fail if the situation arose," St. LouisFederal Reserve President James Bullard told reporters.

Bullard was referring to a situation where a bank gets sobig that it is too costly to let it fail if it gets intotrouble. This is a competitive advantage a big bank can exploitthrough access to cheaper capital, which allows it to grow evenlarger.

Some fed officials advocate simply breaking apart thebiggest banks and Bullard has aligned himself with that camp.

"I do not think that we need firms that are so large andcomplicated in order to have a healthy intermediation sector inthe U.S.," he said. "We would be better served by a setup thathad smaller firms in a competitive landscape across the sector."

Fed Board Governor Daniel Tarullo suggested in a speech onWednesday that Congress might want to think about new laws tocap the size of banks relative to the size of the U.S. economy.He argued this would tie their growth to the county's own growthand consequent ability to absorb the shock if they got intotrouble. Bullard said that the suggestion had merit.

"Scaling by GDP (gross domestic product)... in generalterms, would make sense," he said. "Of course, the devil is inthe details of exactly how you would do that. But over time, asthe economy continues to grow, you would have to think aboutwhat constitutes big and what constitutes small."

Big U.S. banks have been sharply critical of parts of theDodd-Frank financial reform legislation that contains limits onfinancial sector concentration as too complex. Bullard said hewould prefer "multi-dimensional" measures of what too big meantand then ask firms to stay beneath those thresholds.

(Reporting by Alister Bull. Editing by Andre Grenon)

((alister.bull@thomsonreuters.com)(+1-202-898-8392, ReutersMessaging: alister.bull.thomsonreuters.com@reuters.net))

Keywords: USA FED/BULLARD