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Outgoing Fed official sees room for banking rule changes, but fears financial crisis forgetfulness

April 6, 2017 at 6:25 PM EDT
Federal Reserve governor Daniel Tarullo was central to the implementation of the Dodd-Frank Act, which imposed tougher regulations on banks in the wake of the financial crisis. Though his term isn't up until 2022, Tarullo is now stepping down, just as President Trump is expected to scale back much of the regulation put in place. Tarullo joins economics correspondent Paul Solman for a conversation.
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JUDY WOODRUFF: Now a conversation with outgoing Federal Reserve Board Governor Daniel Tarullo.

As Republicans set their sights on major changes to Obama era financial reforms, our economics correspondent, Paul Solman, sat down with the Fed’s point person on bank regulation, who played a major role in putting them in place.

It’s part of our series Making Sense, which airs every Thursday.

PAUL SOLMAN: Federal Reserve Governor Daniel Tarullo has been called one of the most powerful U.S. banking regulators since Alexander Hamilton. Appointed by President Obama in 2009, Tarullo was central to the implementation of the 2010 Dodd-frank Act, which imposed tougher regulations on banks in the wake of the financial crisis.

Under his watch, the Fed has sought to curb banks’ reliance on short-term loans and to increase the amount of capital they must keep on hand. But President Trump is expected to try to scale back much of what was put in place.

On our visit to the Fed last week, Tarullo’s wasn’t the only empty office we found. Since Senate Republicans refused to vote on two of President Obama’s nominees, there are now three openings on the seven-member board of governors. That means President Trump will have a chance to put his mark on Fed policy going forward.

Daniel Tarullo, welcome to the program.

DANIEL TARULLO, Federal Reserve Governor: Good to be with you.

PAUL SOLMAN: Your appointment’s through 2022, right, so why are you leaving now?

DANIEL TARULLO: Well, you know, eight years is a long time. I came here, along with other people, with a sense of the need to rebuild the financial regulatory system.

I think we have made a lot of progress towards that end. And I think there comes a time where everybody individually wants to do something else, and where it’s time to let other people try their hand at the job you have been occupying.

PAUL SOLMAN: Well, in this case, try their hand at dismantling what you in particular have been doing.

DANIEL TARULLO: Well, I don’t really expect that there’s going to be a dismantling of some of the major accomplishments that we have had. And I certainly hope not. And I don’t think it would be something the American people would want to see, Democrats or Republicans, particularly with respect to the additional requirements that we and the other banking agencies have placed on the largest, most systemically important financial institutions, those that almost failed during the crisis.

I think there’s a broad-based view that stronger capital requirements and better oversight is something that’s needed there indefinitely.

PAUL SOLMAN: But the criticism has been that you so regulated the system that banks and other financial institutions are not lending as they would have lent in the past, and that that’s made the economy a lot less vibrant than it would otherwise have been and could have been.

DANIEL TARULLO: Sure, we could go back to a time in 2004, ‘5 and ‘6 when there was lending against no collateral, no down payments for houses. Sure, that is a lot more lending, and, in the short term, it feels good, but it’s not sustainable lending. It’s not sound lending.

And, of course, we saw the results. So, I think you both find today that they’re — the problem that banks see is not that they have too little capital in order to be able to make loans. The problem they see is still not enough demand to make more loans.

PAUL SOLMAN: Were you afraid, as you put all these regulations in place, that there was going to be another crash if you didn’t?

DANIEL TARULLO: I don’t expect that in the near-term, because, of course, everyone is still adjusting and making their balance sheets sounder and more healthy in the wake of the crisis.

PAUL SOLMAN: They’re still remembering the crisis.

DANIEL TARULLO: Yes.

But you do see memories start to fade. And I do worry that even now, about a year or two or three from now, it will be too easy for people to forget the situation that some of our biggest banks were in, where they needed taxpayer funds in the fall of 2008 in order to stay solvent, and then retreat from the fairly rigorous set of regulations we have put in place.

Now, look, some things will need to be changed, reconciled with each other, and certainly with respect to the smaller banks, we will want to ramp back on some of the regulation. They have been kind of caught in the snares that were set for the banks that do involve the integration of capital markets and traditional lending.

PAUL SOLMAN: What would you change about the regulation of the financial system now that you might even have been instrumental in implementing when you first came in?

DANIEL TARULLO: Sure.

I think we do need it to be somewhat simpler than it is now. One very good example is that of the Volcker rule. We’re sitting here in the shadow of former Chairman Volcker’s portrait.

He proposed a very straightforward idea.

PAUL SOLMAN: The idea: bar commercial banks from making certain risky investments with their own funds, so-called proprietary trading. But Tarullo thinks the rule is simply too complicated to apply.

DANIEL TARULLO: First off, Dodd-Frank had five different federal agencies involved in implementing the rule. And so we really had four or five different Volcker rules, rather than just one.

And, secondly, the way that we tried to implement it, by trying to discern the intentions of the traders, do they mean to be engaged in proprietary trading, I think has just shown itself not to be feasible.

We, the agencies, could go back and try to find simpler ways to enforce the Volcker rule. And perhaps someday Congress would reconsider some of these rule-makings that have three or four or five or six agencies having to do everything simultaneously.

PAUL SOLMAN: What do you expect to happen now that there are three vacancies on the Board of Governors, which President Trump will have the opportunity to appoint, and presumably can redirect, or have a substantial influence on redirecting the Fed, and if he were to not reappoint Chair Yellen, even more of an impact?

DANIEL TARULLO: Well, I don’t think I want to speculate about what appointments the president may make.

I think we have got a good tradition in this country of people being appointed to the Fed who take their job seriously and who try to work with one another, even when they have different views. And my hope and expectation would be that that’s what would continue on into the future.

PAUL SOLMAN: Are you not worried about the pendulum swinging too far in the other direction towards deregulation once again?

DANIEL TARULLO: I am concerned about that. There is certainly the potential for making some changes to regulations, particularly as they affect smaller banks, which I think would be just fine.

I do have concerns that, with respect to the largest, most systemic institutions, people not forget the reason why we put these higher capital requirements in place in the first instance.

PAUL SOLMAN: So, then why didn’t you stay and fight the good fight?

DANIEL TARULLO: You can do the job you do. You try to put something in place. And then one moves on.

And I don’t think anybody can ever tell themselves that they are the most important cog in a particular position. It’s just not the case.

PAUL SOLMAN: Daniel Tarullo, thank you very much.

DANIEL TARULLO: Thank you.

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