Greenspan says banks should not become too big

Former Fed Chairman Alan Greenspan in a file photo.

LONDON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan recommends graduated capital requirements for banks to cut back their size.

"New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns," he writes in Friday's Financial Times.

"The solution is to have graduated regulatory capital requirements to discourage them from becoming too big and to offset their competitive advantage."

Greenspan is widely blamed for allowing financial firms to outgrow government oversight and in October last year he acknowledged that he was partly wrong to resist the regulation of some securities.

He said in Friday's FT that while regulators could enforce collateral requirements, they could not fully forecast if, for example, sub-prime mortgages would turn toxic.

(Reporting by Ben Deighton, editing by Carol Bishopric)