Who will watch the banks un­der Trump?

The Hamilton Spectator - - OPINION -

This editorial ap­pears on Bloomberg View:

Nearly a decade af­ter a dev­as­tat­ing fi­nan­cial cri­sis, the U.S. re­mains poorly pre­pared for a re­peat. So it’s un­set­tling that Daniel Tarullo, the Fed­eral Re­serve of­fi­cial who has done the most to make the coun­try’s banks stronger, plans to step down — and all the more im­por­tant that Pres­i­dent Don­ald Trump find a wor­thy re­place­ment.

The 2008 cri­sis ex­posed weak­nesses at the heart of the U.S. fi­nan­cial system. Big banks had so lit­tle loss­ab­sorb­ing cap­i­tal that they rapidly fal­tered, bring­ing down the econ­omy and leav­ing the gov­ern­ment with no op­tion but to res­cue them at tax­payer ex­pense.

Ap­pointed in 2009, and guided by the Dodd-Frank fi­nan­cial re­form, Tarullo led ef­forts to strengthen the fi­nan­cial system. The Fed adopted cap­i­tal re­quire­ments sig­nif­i­cantly more de­mand­ing than those laid down by in­ter­na­tional reg­u­la­tors, and tied them to liq­uid­ity rules aimed at en­sur­ing banks would al­ways have enough cash to meet their near-term obli­ga­tions. It in­tro­duced reg­u­lar stress tests de­signed to assess banks’ abil­ity to weather a cri­sis, and de­manded that they pro­duce “liv­ing wills” de­scrib­ing how they could go bust with­out caus­ing wider harm.

Tarullo’s work is far from done. On av­er­age, the largest U.S. banks now have about $6 in eq­uity for each $100 in as­sets. That’s more than in 2007, but still not enough. The stress tests aren’t yet suf­fi­ciently re­al­is­tic. Tarullo had a plan for im­prov­ing them, but he won’t be around to see it through.

Tarullo seems op­ti­mistic about what will hap­pen af­ter he leaves. He says Trump’s “core prin­ci­ples” for fi­nan­cial reg­u­la­tion — which in­clude avoid­ing bailouts and ad­dress­ing sys­temic risk — are a “good start­ing point.” Cer­tainly, main­tain­ing Tarullo’s push for more eq­uity cap­i­tal would be an ex­cel­lent way to fur­ther those prin­ci­ples. Cru­cially, by mak­ing the whole system more re­silient, that would also al­low the reg­u­la­tory bur­den to be lifted in other ar­eas.

Trump now has three va­can­cies to fill on the Fed’s board of gov­er­nors. The pres­i­dent’s top eco­nomic ad­viser be­lieves that “per­son­nel is pol­icy.” Let’s hope they choose some­one ca­pa­ble of fin­ish­ing what Tarullo started.

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