(Adds comments on Cummings and adds byline, changes dateline,
previous WASHINGTON)

By Ros Krasny

WOOSTER, Ohio, April 2 (Reuters) - Gary Stern, the Federal
Reserve's longest-serving regional president and a vocal
critic of big bank bailouts, will retire in the summer of
2009, the Minneapolis Fed said on Thursday.

Stern, 64, has made his battle cry the issue of "too big
to fail," or the problems created when massive banks or
financial institutions are given preferential treatment
because of their sheer size or perceived systemic risk.

"It has been truly an honor to spend most of my career
working at the Federal Reserve Bank of Minneapolis," Stern
said in a statement released by the regional bank.

Stern has led the bank since 1985.

James Hynes, chairman of the Minneapolis Fed's board of
directors and executive administrator, will head a committee
to conduct a search for Stern's replacement.

Recent buzz within the central bank has been that
Christine Cumming, first vice president of the New York Fed,
is the front runner to replace Stern as the head of the Fed's
Ninth District.

Cumming, 56, was born in Minneapolis. She earned her B.S.
and Ph.D. in economics from the University of Minnesota. She
joined the Fed in 1979 as an economist in the international
research department

She is an alternate voting member of the Federal Open
Market Committee and was seen as a short-listed contender for
the top New York Fed job ultimately given to William Dudley in
January.

Dudley replaced Timothy Geithner, who is now President
Obama's Treasury secretary.

If appointed, Cumming would increase to three the number
of current female regional Fed presidents, serving alongside
Cleveland's Sandra Pianalto and San Francisco's Janet Yellen.

"While Stern tended to be on the hawkish side, he does not
have a record of dissent, so unless his replacement is
outspoken, the market implications are modest," said
strategists at 4CAST Ltd in New York.

'TOO BIG TO FAIL' GAINS CURRENCY

The Minneapolis central bank did not give an exact date
for Stern's departure. Under Fed rules, his mandatory
retirement date would be Nov. 3, his 65th birthday.

"We have faced considerable challenges over this time, and
certainly today's financial and economic environment has been
the most difficult," Stern said.

"I am confident that with the chairman's (Ben Bernanke)
leadership, along with other outstanding policy-makers in the
Federal Reserve, our financial system will fully stabilize and
our economy will once again resume growth," Stern said.

Stern and Minneapolis Fed economist Ronald Feldman
published "Too Big to Fail: The Hazard of Bank Bailouts" in
2004. The book examined the way moral hazard is created when
policy-makers shield bank creditors from losses they would
face when mega-banks and other financial institutions are
deemed too big or too systemically important to be allowed to
fold.

The financial crisis that erupted in 2007 gave new legs to
the "too big to fail" issue, which has provided fodder for a
number of Stern's speeches and papers since then.

The book argues that protection of uninsured creditors of
systemically important financial institutions leads to
underpricing of risk and, therefore, excessive risk-taking,
which in turn sets the stage for turmoil in financial markets
and disruption in the economy.

Speaking in Minneapolis last week, Stern seemed
vindicated.

"If policy-makers had focused on our recommendations, we
would at a minimum have been better prepared to address the
problems that have arisen over the last 20 months," he told
the Economic Club of Minnesota.

Recently Stern has proposed a program of "systematic
focused supervision" designed to minimize the potential
spillover effect of large institutional failures.
(Additional reporting by Melissa Bland and Mark Felsenthal in
Washington; Editing by Jan Paschal)