In his parting speech as a member of the Board of Governors
of the Federal Reserve System ("FRB"), Governor
Daniel K. Tarullo asserted "that strong capital
requirements are central to a safe and stable financial
system." He described the post-crisis atmosphere in which
regulatory capital requirements were first proposed, and evaluated
the subsequent adoption of the
Dodd-Frank Act. Noting that a statute as broad as Dodd-Frank
could not possibly get everything right, Governor Tarullo cited the
Volcker Rule as an area where the "case for change has
become fairly strong":
[T]he Volcker rule is too complicated. Achieving compliance
under the current approach would consume too many supervisory, as
well as bank, resources relative to the implementation and
oversight of other prudential standards. And although the evidence
is still more anecdotal than systematic, it may be having a
deleterious effect on market making, particularly for some less
Governor Tarullo identified the following flaws in the Volcker
Rule: (i) it involves five regulatory agencies, (ii) it
contemplates evaluating the mindset of a trader at the time a trade
is made, and (iii) it applies to a much broader group of banks
(including community banks) than necessary.
Governor Tarullo championed the "risk-based" capital
approach as the best post-crisis capital buffer, noting that no
single measure of capital would be appropriate. He advocated moving
toward a simpler approach for community banks and rejected a recent
proposal to implement a broad leverage ratio, increased to 10
percent, as a substitute for existing regulation. He argued that a
higher leverage ratio would "make banks less profitable, and .
. . they would be strongly incentivized to change the composition
of their balance sheets dramatically, shedding safer and more
liquid assets" if the new ratio became the predominant
Governor Tarullo also evaluated the unfinished "transition
of stress testing from crisis program to a permanent feature of
prudential oversight." He stated that for stress testing to
succeed, it must evolve along with the financial system. He opposed
removing capital distributions from the stress-test regime claiming
that it would result in fewer protections for the financial
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