Fed's Tarullo Says Progress on Too-Big-to-Fail Will Be 'Durable'

  • Departing governor says too early to tell what Trump will do
  • Tarullo stepping down as agency’s supervision head in April

Fed's Tarullo: 'Not There Yet' on Too-Big-to-Fail

Daniel Tarullo, the Federal Reserve’s point man on financial regulation, said the U.S. effort to ensure Wall Street banks aren’t too big to fail isn’t finished yet, but that he believes the progress regulators have made will stick even after the Trump administration replaces him.

The Fed and other agencies have made major strides in creating structures that would allow big financial firms to be safely wound down after a failure, Tarullo said Wednesday in a Bloomberg Television interview with David Westin and Carol Massar. Regulators still need to bolster the financial system against the potential for broad runs on capital like those seen during the 2008 credit crisis, he said.

Federal Reserve Governor Daniel Tarullo discussed the risks he sees lingering in the banking industry on Feb. 15.

Source: Bloomberg

“When someone comes and tells you we’ve solved the too-big-to-fail problem, that’s when you should begin to get worried,” said Tarullo, who said last week that he plans to step down as a Fed governor in April.

He said the rules overhaul inspired by the Dodd-Frank Act “should have durability,” though it’s “far too early to tell” what will come of the anti-regulation rhetoric from President Donald Trump and his administration.

Tarullo, who spearheaded the push to make banks safer after the crisis, said vulnerabilities remain. He said more work must be done to enable big banks to fail without endangering their peers, and pointed to hazards related to the types of bank funding that are susceptible to runs. As banks change their business models over time and find new ways to make a profit, regulators need to adapt to be able to identify new risks that are created, Tarullo said.

The 64-year-old academic earned a reputation as one of the toughest supervisors of banks during his eight years at the Fed. He announced his plans to step down last week, sending a two-sentence resignation letter to Trump. His departure means the president will soon get to fill three of the Fed’s seven board positions.

The annual stress tests designed to show whether banks can withstand economic shock are the “single most important” development in bank supervision in recent decades, Tarullo said. At the same time, some of the rules the Fed and other regulators have implemented have been too tough on the smallest banks, he said.

Tarullo said he came to the Fed after the financial crisis hoping to be part of the kind of changes that have been put in place.

“I think there’s a broader consensus in the country that we cannot repeat what happened,” he said.

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