The biggest U.S. banks must decide whether to voluntarily reducetheir size and complexity or face capital charges that are some ofthe toughest in the world, the Federal Reserve's topfinancial-regulation official said today.

Fed Governor Daniel Tarullo outlined the central bank's plansfor capital surcharges surpassing those of international regulatorsat a Senate hearing on progress in implementing rules to prevent arepeat of the 2008 credit crisis. The Fed's formula for surchargeswill also hit hardest against those that lean most on short-termwholesale funding, he said.

“We're all trying to come to grips with what we really need inorder to provide more assurance that these firms do not threatenthe financial system,” Tarullo told the Senate Banking Committeesaid. Banks will have to weigh a tradeoff between complexity andcapital demand and may choose to trim the cost by shrinking their“systemic footprint.”