In his first major speech as a Federal Reserve Board governor, Daniel Tarullo argued that "the case for far-reaching reform appears a strong one," and that policymakers should not shut the door to capping the size of financial institutions.

"Proposals to limit the size or interconnectedness of financial institutions would represent a historic break with how we have regulated the financial system," he said in a speech to the Peterson Institute for International Economics.

"However, if one accepts the basic premise that our financial system will remain healthy only if the 'too big to fail' problem is addressed in a muscular way, this kind of idea has at least heuristic value in making us think hard about the degree to which the regulatory path we set for ourselves is leading to the proper destination of greater financial stability," he said.

Tarullo also expressed interest in requiring financial institutions to hold debt that could be converted into stock if capital buffers needed to increase.

"Like the long-standing proposals for mandatory subordinated debt, this proposal is one that can be usefully discussed as either a complement to or partial substitute for existing capital rules," he said.

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