Fed’s Tarullo Stepping Down as Top Regulator of Wall Street

(Bloomberg) -- Daniel Tarullo, the Federal Reserve official who spearheaded the push to make banks safer after the 2008 financial crisis, plans to step down in early April, amplifying President Donald Trump’s ability to reshape the central bank’s oversight of Wall Street and monetary policy.

As the Fed governor who handled regulation, Tarullo often took the lead in implementing new rules and in defending the government’s response to the crisis before Congress. Because he earned a reputation as one of the toughest supervisors of banks, the industry quietly welcomed news of his resignation Friday.

Tarullo’s departure means Trump will soon get to fill three of the Fed’s seven board positions, as there are two existing vacancies. All governors have votes on the Federal Open Market Committee that sets U.S. interest rates. In addition, Janet Yellen’s term as chair expires in Feb. 2018, followed by Stanley Fischer’s term as vice chair in June of next year. The openings give Trump the chance to significantly put his stamp on the world’s most powerful central bank.

Tarullo weighed leaving for a couple of years before deciding in the fall that he’d go “regardless of the outcome of the election,” he said in an interview. As for his singular influence in crafting banking regulations, he said “no one person is of particular importance in any of this; It was a group effort to get these in place.”

Busiest Periods

Tarullo, 64, is leaving well short of the 2022 end of his term. His time on the Fed board came during one of the busiest periods in the central bank’s history, with massive demands from the 2010 Dodd-Frank Act to overhaul the U.S. financial system in an effort to prevent a repeat of the 2008 meltdown. The Fed and other agencies put sweeping capital, liquidity and risk-dampening rules in place that have profoundly changed how banks do business.

“Dan led the Fed’s work to craft a new framework for ensuring the safety and soundness of our financial system following the financial crisis and made invaluable contributions across the entire range of the Fed’s responsibilities,” Yellen said in a Friday statement.

During his tenure at the Fed, the longtime professor was well known for his quick temper and for delivering lengthy speeches that were heavy on theory and footnotes. And when it came to interagency work on regulating, he was consistently hard on the biggest Wall Street firms, especially in demanding that megabanks maintain ample war chests of capital and easy-to-sell assets so they’d never again come knocking on taxpayers’ doors. He also occupied a leading role as an international negotiator who insisted on tough global banking standards.

In a two-sentence resignation letter sent to Trump Friday, Tarullo said that it has been “a great privilege” to work with former Fed Chairman Ben Bernanke and Chair Yellen during such a “challenging period for the nation’s economy and financial system.” He said he’d leave “on or around April 5.”

‘Major Reorientation’

In his first months as a governor, even before Congress approved Dodd-Frank, Tarullo called for a “major reorientation of our regulatory and supervisory system.” Since then, he often carried the baton to make that overhaul happen, weighing in on stress testing, tough capital standards and plans for how Wall Street firms could safely collapse without threatening the broader financial system.

More recently, Tarullo -- once labeled by a lawmaker as the “alpha dog” of financial regulators -- has acknowledged that some of the rules he implemented have been overly tough on smaller banks. He most notably suggested that Dodd-Frank’s $50 billion asset threshold for lenders to receive the tightest scrutiny may have been set too low. In 2016 speeches, he advocated going easier on community banks and said there is probably room for “refinements” in how authorities have addressed risks to the financial system.

Still, Trump’s calls to dismantle Dodd-Frank are a direct challenge to Tarullo’s legacy at the Fed. Tarullo recently warned “against backsliding on the considerable progress that has been made.” As one of the three board vacancies, Trump is expected to name a vice chairman of supervision -- a never-filled role established by Dodd-Frank -- who will largely assume the job vacated by Tarullo.

“He showed that the assertive application of Dodd-Frank could really change the regulatory environment,” Vincent Reinhart, chief economist at Standish Mellon Asset Management in Boston, and a former senior Fed staff member, said of Tarullo. “His leaving just raises the question of how much could an equally assertive vice chair unwind what he did.”

‘Broad Support’

One of the key rules Tarullo has been working on could have added billions to the capital that Wall Street banks must maintain to pass the Fed’s stress tests, annual assessments used to determine whether lenders can survive severe financial meltdowns. Tarullo said he expects the work to continue even after he leaves.

“There’s a lot of support here at the board for these changes,” he said.

Tarullo taught banking law at Georgetown University before President Barack Obama tapped him to join the Fed. Prior to Georgetown, he was an assistant to President Bill Clinton, helping him devise his international economic policy and serving on his National Economic Council. Tarullo had also worked as assistant secretary of state for economic and business affairs in the 1990s.

The Boston native’s earlier career included stints at the Department of Justice and in the Commerce Department, work on the staff of Democratic stalwart Senator Ted Kennedy and teaching at Harvard Law School.

What’s Next?

“I think there’s a pretty good chance I go back to teaching, but I really haven’t made any decisions, yet,” Tarullo said.

While Tarullo’s departure will be felt most on regulation, the lawyer held his own in debating monetary policy among the PhDs at the FOMC. When the committee met in November 2010 and launched a second round of asset purchases to support the economy, Tarullo argued that a long period of weak growth and high unemployment was wreaking lasting damage -- an idea that was taken up as the consensus six years later. Tarullo was also known for taking a cautious approach in raising interest rates.

His planned resignation is the second major departure announced by the Fed this week. On Wednesday, the central bank said General Counsel Scott Alvarez, who played a key role in approving many of the emergency measures taken by the Fed during the financial crisis, would retire later this year.

“The greatest concentration of expertise on bank regulation is now leaving the Fed,” said Peter Conti-Brown, author of the “The Power and Independence of the Federal Reserve” and a financial historian who teaches at the University of Pennsylvania. “This means Donald Trump will have a profound opportunity to shape the direction of both bank regulation and bank supervision.”

--With assistance from Christopher Condon Craig Torres Robert Schmidt Hugh Son Laura J. Keller Dakin Campbell and Jeanna Smialek To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net. To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott