Federal Reserve Bank of St. Louis President James Bullard said he favors size limits for financial institutions to help boost stability.

Steps U.S. regulators are taking don't "fully arrest the problem of too-big-to-fail" and a better solution would be to "limit the size of these institutions," Bullard said in an interview with Bloomberg News today. He acknowledged that regulators "haven't really gone in that direction" and said he didn't have specific limits in mind because "I've never been able to get the debate to get serious about this."

Size limits would reduce "economies of scale" for large banks while making the financial system "more stable," Bullard said in Washington. "It seems to me like that might be a good trade to make."

The Fed is pressing large banks to make themselves easier to unwind if they are in danger of failing -- without requiring them to shed assets or units. In August, the Fed and the Federal Deposit Insurance Corp. rejected so-called living wills from 11 of the largest U.S. and foreign banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., telling the lenders to simplify their legal structures.

Bullard said he is skeptical of living wills because he thinks they will "sit on the shelf" if a bank was in danger of failing. "A real crisis would mean all of sudden there was a new round of negotiations" between regulators and the institution, he said.

Large financial firms should decide for themselves how to get smaller, Bullard said.

"I would not have regulators coming in and saying, 'Well, you have to get rid of this business or you have to get rid of that business,'" he said. "I'd prefer to set size limits and then let the board of directors and management make the decisions about how they're going meet this."

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