Top Federal Reserve official resigns as bank deregulation looms

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By Jason Lange and Lisa Lambert | WASHINGTON

WASHINGTON The Federal Reserve Board’s top bank
regulator said on Friday he would resign, giving a boost to
President Donald Trump’s plans to ease reforms put in place
after the 2007-09 financial crisis.

Daniel Tarullo, a strong regulator who was dovish on
monetary policy in his seven years on the board, said in his
resignation letter to Trump he would leave the U.S. central bank
on or around April 5.

With his resignation, Trump will have three positions to
fill on the Fed’s Board of Governors, which at full strength has
seven members.

Much of Tarullo’s legacy involves erecting safeguards after
the 2007-2009 financial crisis and accompanying recession, where
big banks crumbled or were driven by the Fed and U.S. Treasury
into shotgun mergers intended to make them stronger.

With the goal of never needing taxpayer bailouts of failed
banks, Tarullo has been strict about carrying out the 2010
Dodd-Frank Wall Street reform law and administering rigorous “stress tests” annually to banks on how prepared they are to
withstand unexpected shocks.

The tests gave Tarullo huge control over the largest U.S.
banks. Performance in the exams dictates how much money they can
return to shareholders in dividends or spend on stock buybacks.
Failure puts bank bosses under pressure and lenders devote
thousands of staff and hundreds of millions of dollars to
passing the tests.

Tarullo has also pushed for bigger capital buffers and other
checks on potential risks banks may pose to the world’s
financial system.

His departure leaves many questions about the future of
financial regulation. Tarullo sees the direction of changes
under Trump as unclear, but said he expects the core elements
put in place during his tenure of increasing capital
requirements, risk management, and a resolution regime for big
banks may survive.

“I’m hopeful that they really do command a broad enough
consensus that this was a way to combat the ‘too big to fail’
problems which obviously bedeviled the system in the years
leading up to and in the crisis itself,” he said in an interview
with Reuters.

One bank executive, who declined to be quoted by name, said
the industry is relieved the Tarullo era is over. Bankers had
long complained he and his staff kept changing the stress tests
and balance-sheet reviews in ways that arbitrarily ratcheted up
capital requirements behind closed doors.

“He made up rules in a black box and would not bother to
explain their rationale to banks,” the executive said.

Tarullo said changes to the stress tests, known by the
acronym CCAR, that he and Yellen have proposed, on including
capital buffers and a Global Systemically Important Bank
surcharge, are “moving along right now.”

“It’s going to provide more certainty to the banks about
what the next final stage of CCAR will look like,” he said.

Liberal and progressive groups said Tarullo had fought to
protect Americans from another financial crisis or economic
catastrophe.

“Governor Tarullo has stood steadfast as a sentinel on the
front lines of a six-year war to turn the Dodd Frank financial
reform law into a reality,” said Dennis Kelleher, president of
Better Markets, a group created to promote economic stability.

Besides crafting regulation, Tarullo is a voter on interest
rate policy, with a record of tending toward caution on raising
rates. The Fed signaled in December it could raise rates three
times this year. Tarullo plans to attend the March meeting.

LIFE AFTER TARULLO

Bank stocks moved higher in the moments following Tarullo’s
resignation announcement, with the S&P banks industry group
index rising 0.35 percent.

The Trump administration has already said it would appoint a
new Fed governor charged with heading financial regulation, a
post created in Dodd-Frank. Tarullo was never formally confirmed
for it, but stepped into the role.

In addition to the three appointments Trump will be able to
make soon, he will be able to nominate a replacement for Fed
chief Janet Yellen when her four-year term as chair ends in
January 2018. Fed Vice Chairman Stanley Fischer also completes
his term in 2018.

David Nason, a former deputy to Treasury Secretary Henry
Paulson in 2008 and General Electric executive, is the front
runner for the regulation post, according to sources familiar
with the matter. John Allison, a former BB&T CEO who has said he
would like to abolish the Fed, has also been mentioned as a
potential nominee.

In recent months, Tarullo sharply questioned moves by
Republican lawmakers to roll back post-crisis regulations,
putting him at odds with House Financial Services Committee
Chairman Jeb Hensarling. Last year he criticized Hensarling’s
proposal to give banks a choice between complying with
Dodd-Frank or holding higher amounts of capital, saying the
capital ratio was too low. Hensarling is expected to introduce a
new draft of the bill soon. (Additional reporting by Jonathan Spicer and Jennifer Ablan in
New York and Ann Saphir in San Francisco)



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