* Hubbard counters idea floated by Fed's Tarullo
* Says too difficult and arbitrary, better left to market
* Too-big-to-fail could surface in presidential debate
By Jonathan Spicer
NEW YORK, Oct 16 A top adviser to presidential
candidate Mitt Romney on Tuesday dismissed an idea to cap the
size of big banks floated last week by a senior U.S. Federal
Glenn Hubbard, an economic advisor in the Republican camp,
said market forces would keep the size of financial institutions
in check better than difficult and arbitrary government limits
on banks judged too-big-to-fail.
Last week, Fed Governor Daniel Tarullo surprised Wall Street
when he called on Congress to legislate "an upper bound point of
reference" for banks based on their percentage of U.S. Gross
The issue of too-big-to-fail banks could resurface later on
Tuesday when Romney faces off against President Barack Obama in
the second of three debates ahead of the Nov. 6 poll. The
stumbling economic recovery since the financial crisis has so
far dominated in the campaign.
The comments from Tarullo, appointed to the Fed board by
Obama, suggest regulators are still keenly worried that massive
and complex banks can threaten the financial system, four years
after the worst of the crisis.
Hubbard, dean of the Columbia Business School, on Tuesday
added to the criticism that has since come from Wall Street.
"I understand Dan Tarullo gave those remarks. I disagree
with them. First of all I'm not quite sure what a cap would be
and how I would figure it out," Hubbard said in response to a
question at a National Association for Business Economics
"The reason we're concerned about big banks is that they're
too big to fail," he added. "If the market forces say these
banks are too big and too complex, they will be wittled down to
size. And I think that's a much better (solution) than arbitrary
limits on bank sizes."
Hubbard made the argument as news headlines surfaced that
the chief executive of the third-largest U.S. bank, Citigroup
Inc's Vikram Pandit, had abruptly resigned.
Citi was among the banks to receive a bailout during the
2008 crisis. It has since been under close watch by regulators.
The Fed rejected Citi's capital plans this year after
administering a stress test on the bank.
TOO-BIG-TO-FAIL COULD RESURFACE IN DEBATE
Tarullo, the central bank's point person on regulation, made
his surprise proposal last Wednesday as he noted the
difficulties regulators face in deciding which proposed bank
acquisitions should be approved.
The absence of a well-established cap on the size of banks
complicates such decisions, he said at the University of
Pennsylvania Law School, in Philadelphia.
An ever larger bank "increases perceptions of at least some
residual too-big-to-fail quality in such a firm," bringing a
possible funding advantage that "reinforces the impulse to
grow," said Tarullo, a one-time aide to former President Bill
Clinton. He floated tying the non-deposit liabilities of banks
to a specified percentage of the country's GDP, though he did
not suggest a number.
"There is, then, a case to be made for specifying an upper
bound," Tarullo said, adding, "it would be most appropriate for
Congress to legislate on the subject."
During the previous presidential debate, Romney reiterated
his plan to repeal the landmark Dodd-Frank financial regulation
bill, while Obama countered that the economic crisis was brought
on by insufficient oversight of reckless behavior on Wall Street
Asked about Romney's debate strategy, Hubbard told Reuters
on the sidelines of the conference: "His objective is to
continue the conversation with voters about what the right
economic policies are for the country.
"He did that really well last time, and I'd be stunned if he
doesn't do it well tonight," the adviser added.