WASHINGTON (Reuters Breakingviews) - Daniel Tarullo is giving banks a generous parting gift. The tough Federal Reserve governor told President Donald Trump on Friday that he is resigning five years before his term expires in 2022. Tarullo was the most influential architect of post-crisis financial reform, including the stress tests. His exit may be one of the biggest determinants of how banks are overseen.
Since his appointment by Barack Obama in 2009, Tarullo has been a regulatory force. Although he did not hold the title of vice chairman of bank supervision, it was a role he essentially served. Critical of what he saw as the central bank's lax approach to watching over financial institutions, Tarullo worked to centralize control in Washington, diminishing the role of the Fed's New York branch.
He pushed for tougher capital rules than international Basel standards require, often describing the Fed's version as "super-equivalent." In 2014, for example, the Fed approved a 6 percent supplementary leverage ratio, twice as stringent as the global criteria, for the insured deposit units of the largest banks.
Wall Street chieftains routinely balked at the annual stress tests, complaining they are too opaque and arbitrary. Citigroup, Deutsche Bank and others were tripped up by the so-called qualitative part of the exams, which measure operational risk and other subjective factors. Failing means banks can't pay additional dividends or buy back more shares, putting extra pressure on management. Last year, Tarullo announced proposals that could make the tests even tougher, including adding what he called a stress capital buffer.
Unlike a softening of the Dodd-Frank law, which Trump and many Republicans advocate, most changes to the stress tests don't need congressional approval. The central bank's staff, which has been led by Tarullo, devises the scenarios and assesses the results. The Fed also has leeway on how strongly to enforce other rules or guidance, such as restrictions on leveraged lending.
In all probability, Tarullo's power would have been weakened by the addition of a new vice chair of supervision. By deciding not to stick around, though, he has left another big opening for Trump to fill. Whoever succeeds Tarullo will be in a better position to roll back regulation than any attempt to reform Dodd-Frank.