WASHINGTON The idea that Federal Reserve Board Gov. Daniel Tarullo is the most powerful central banker for bank supervisory matters has been conventional wisdom in the financial services industry for years.
The Wall Street Journal recently obtained and reported on 2010 documents that confirmed a formal seizure of power from the New York Fed, but the gist of the change was no secret. Since Tarullo took office in 2009, the Fed has centralized power at the board and taken a decidedly more aggressive view on several bank regulatory issues, including capital requirements and stress tests, as an American Banker story published in 2013 details here.
All the focus on Tarullo raises an interesting question: what happens when he leaves?
Tarullo's term runs through 2022 and he shows no signs of being restive in the role yet. Still, much of the Fed's decidedly more hawkish view on bank regulation stems from Tarullo, and reform advocates fear that it could become less intense when he departs.
"Gov. Tarullo has clearly had a major impact and his eventual departure will be felt because it is unlikely that any replacement will have his in-depth knowledge of financial regulation and related law and his particular viewpoint," said Douglas Elliott, a fellow at the Brookings Institution. "This opens up the possibility that some of the reforms he has pushed might be revised should he depart, especially as there has been a huge amount of change in financial regulation and there will clearly need to be a recalibration once we get a better idea of how it all works together in the real world."
Tarullo is widely expected to stay at least through the end of President Obama's term next year. The White House never nominated a Fed vice chairman for banking supervision, a position created by the Dodd-Frank Act in 2010, likely because Tarullo is already de facto filling that role and the administration approves of what he is doing. Tarullo, a former Georgetown University law professor, met Obama in 2005, and was a key economic adviser during his 2008 presidential campaign.
Former Fed Chairman Ben Bernanke and current Chair Janet Yellen, meanwhile, have appeared willing to defer to Tarullo on key banking issues. But many Fed governors don't fill out their terms, and a looming presidential election could entice Tarullo, 62, to leave.
If and when that occurs, most observers believe his changes, both structural and cultural, will stick.
"It seems unlikely that the Fed would go back to a pre-crisis approach," said David Min, a law professor at the University of California Irvine.
But banking issues could begin to recede again in favor of other Fed priorities, he said.
"Tarullo has been very focused on bank regulatory issues," said Min. "The priorities could shift back to inflation and employment while the tight regulation of bank holding companies and SIFI regulation could have less emphasis."
Tarullo has effectively worked behind the scenes to ensure many of his changes survive him, Elliott said.
"He has also shaped a consensus at the Fed that is likely to last for some time forward, and regulations and doctrines acquire their own inertia and are not easy to alter in large ways," said Elliott. "I would expect changes if he left, but not a fundamental shift in direction."
Anil Kashyap, professor at the University of Chicago, noted that part of Tarullo's skill has been in building support among his colleagues.
"Part of the reason why he has been able to drive the debate the way he has is he's had considerable support among the board of governors," said Kashyap. "It's not like he's a cowboy implementing his own vision. Chairman Bernanke and now Chair Yellen have repeatedly backed the proposals he's advocated. It's doubtful that, just because he walks out the door, that others would just change their minds."
Tarullo's departure would, however, force whatever administration is in power to appoint a new Fed vice chair, Kashyap added. Partly because of Tarullo's success in filling that role, that position will be critically important.
"They would presumably have to appoint someone to be vice chair if he leaves," said Kashyap. That person "would have some impact on the direction going forward" and "would have to persuade Tarullo's colleagues, who have supported his positions up to now, that any big changes were warranted."