WASHINGTON — Richard Fisher, president of the Federal Reserve Bank of Dallas, is not shy about the fact he's a former banker.

That's why it's all the more surprising that he's one of the leading advocates for dramatically reducing the size of the largest banks—arguing that failing to do so will jeopardize the health and stability of the financial system.

While others insist it's a call to "break up the banks," Fisher says he'd rather define it as "right-sizing" the institutions.

"Breaking up sounds violent," he said in a recent sit-down interview with American Banker. "We're not trying to be bulls that carry around our own china shop with us. That's not the purpose of the exercise."

Fisher, who has been the top executive at the Dallas Fed since April 2005, is among only three of the now 19-members that sit on the Fed's policy-setting Federal Open Market Committee that is a former banker. (Fed Gov. Elizabeth Duke and James Lacker, president of Federal Reserve Bank of Richmond were also former bankers. )

But Fisher also created his own investment fund, Fisher Capital Management, and a separate funds-management firm, Fisher Ewing Partners, in 1987. (Additionally, he ran for the Senate in Texas in 1993 after Lloyd Bentsen became Treasury Secretary.)

Mentored by Robert Vincent Roosa, a premier American economist and banker, Fisher worked for the Wall Street investment bank Brown Brothers, Harriman & Co. after graduating from Stanford Business School, where he learned the central tenet of his financial philosophy: Know your customer.

"You cannot substitute for judgment and knowing your customer," said Fisher. "I don't believe that risk management models can be driven purely by advanced mathematics. They're helpful. You have to have risk management models, but in the end you have to be in touch with what's going on within your organization and you reach a size and a scope where that becomes very, very difficult to do. We saw that with the Japanese banks. We saw it with the Dutch banks. We saw it with the French banks and we're seeing it here."

Even in the current environment, when JPMorgan Chase's massive trading loss has once again renewed calls for reducing the size of the largest institutions, Fisher is careful not to point any fingers at an individual institution.

"I personally think very highly of Mr. [Jamie] Dimon," Fisher said. "He runs one of the best run mega-institutions in the world. But I think it's an example of what can go wrong. Here's one of the very best people, extraordinarily talented, capable, very proud of the risk management model, something slipped through the cracks. Question: can you really manage something that large? So are there limits to size and scope?"

He says his aim is to ensure the five largest U.S. banks — JPMorgan, Bank of America, Wells Fargo, Citigroup and U.S. Bancorp. — don't continue to enjoy an advantage in the capital markets because of the perception they are "too big to fail."

"The basic underlying principle is if you are a depository taking institution that takes money that is guaranteed by the taxpayer you should be limited in the risk you can take with that cheaper cost of funds," said Fisher. "As Tom Frost said … your first duty is to guarantee the safety of those deposits and give it back to the depositors."

Critics note that Fisher hasn't detailed exactly how he would reduce the size of the banks. But he doesn't seem inclined to weigh in, preferring to leave it largely up to the private sector.

"I'm not going to make specific proposals," said Fisher. "I could put on my old hat, but I think the risk being run there is you might state a bias or stifle creative minds that are likely to come up with creative solutions. Why don't we see what comes out?"

Fisher has been a leading voice in the drive to reduce banks' size, which now includes other luminaries such as James Bullard, president of the Federal Reserve Bank of St. Louis and Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Tom Hoenig, former president of the Federal Reserve Bank of Kansas City and former Federal Deposit Insurance Corp.'s chairman Sheila Bair.

"This may be conceit, but there is a virtue to the argument and sometimes virtue comes to the fore," said Fisher. "I'm glad the argument has been joined, I think it will continue. My expectation is the volume will be turned up on this."

But Fisher is also a realist. In a presidential election year, he knows not much is likely to occur between now and November, but he's optimistic cries for reform will only get louder.

"I think the debate will intensify," said Fisher. "And I think part of it fits in with the mood of the country."

Fisher credits community banks with keeping the issue of "too big to fail" a live, especially as the larger institutions continue to enjoy a funding advantage.

"Community bankers are beginning to exercise their muscle," said Fisher. "They feel like a threatened species. They're endangered. They're worried about further consolidation in their industry, but that is driven by cost considerations of regulation concern and they will tell you that they feel they are placed at a cost of funding disadvantage to the giants and they are getting on their hind legs. I think that's the probably the most powerful force here."

Despite regulatory reform efforts as part of Dodd-Frank, a slew of which are still being put into effect, the perception of 'too big to fail' is hard to erase, Fisher says.

"There still is both in theory and practice a cost of funding subsidy for these large institutions because they are viewed ultimately as 'too big to fail," said Fisher. "We've seen it. It happened. It's in recent memory. And I think it's deeply embedded in the psychology of the market place."

That's why the onus is on regulators, especially the FDIC, which has been given the responsibility of drafting living wills and safely unwinding an institution to give the market assurance it will act. Earlier this month, the agency laid out its strategy of how exactly it would move to unravel a failing bank.

But Fisher, like his former colleague Hoenig — who now sits on the FDIC's board — is skeptical regulators will actually use such rules and might be more inclined to bail out a bank.

"When push comes to shove and a large institution is in trouble, it's highly likely that despite having said, 'I told you so, I told you so, I told you so, we have these rules, we have these rules, we have these rules, that the argument is going to be made, 'We can't let this happen,'" said Fisher.

"We just can't have the same reaction like this last time because people get angry," said Fisher.

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