A major provision of the new banking rules created after the 2008 financial crisis is too complicated and should be revised, the Federal Reserve’s outgoing point man on financial regulation said Tuesday.
“Several years of experience have convinced me that there is merit in the contention of many firms that, as it has been drafted and implemented, the Volcker rule is too complicated,” Fed governor Daniel Tarullo said in an exit interview at Princeton University.
The rule, which is meant to prevent banks from speculating with deposits insured by the government, may be having a “deleterious” effect on market liquidity, Tarullo suggested, floating the idea that small banks might be exempted from it altogether.
Tarullo, who was appointed by former President Barack Obama in 2009, is slated to leave office Wednesday.
After joining the Fed amid the financial crisis, Tarullo played a leading role in implementing new rules required by the 2010 Dodd-Frank financial reform law, and he was viewed as a proponent of more stringent rules than required by the statute.
In his final speech, Tarullo warned against changing the requirements for banks to maintain higher levels of capital, saying that forgetting the lessons of the crisis would be “tragic.”
Nevertheless, he suggested opening the door to changing not only the Volcker Rule, but also the stress tests that have become high-stakes, high-profile events for banks, which can be prohibited from paying out dividends if they fail.
In criticizing the Volcker Rule, Tarullo said one problem was that it was written by five agencies, a massive undertaking that hurt the final product.
Revisiting the rule is near the top of the agenda for Republicans.
Treasury Secretary Steven Mnuchin has expressed interest in changing the rule. Congressional Republicans, citing Fed research indicating that it may have made liquidity less available, are expected to introduce legislation that would repeal it.
In his farewell, Tarullo expressed optimism about the state of the financial system. “We can feel relatively good about the footing on which we’ve placed ourselves,” he said.
Asked about new threats, the outgoing regulator warned of cyberattacks on banks, which he called a “whole different kind of risk.”
