Daniel K Tarullo: Departing thoughts

Speech by Mr Daniel K Tarullo, Member of the Board of Governors of the Federal Reserve System, at the Woodrow Wilson School, Princeton University, Princeton, New Jersey, 4 April 2017.

Tomorrow is my last day at the Federal Reserve. So in this, my final official speech, it seems appropriate to offer a broad perspective on how financial regulation changed after the crisis. In a moment, I shall offer a few thoughts along these lines.  Then I am going to address in some detail the capital requirements we have put in place, including our stress testing program.  Eight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system.  It is important for the public to understand why this is so, especially at a moment when there is so much talk of changes to financial regulation.

The Post-Crisis Regulatory Response

To understand the regulatory changes made in response to the 2007 to 2009 financial crisis, it is useful to recall the circumstances with which regulators and legislators were confronted.  First, of course, was the sheer magnitude of the impact on the economy, which suffered its worst recession since the Great Depression. Second was the dramatic freezing up of many parts of the financial market, risking successive waves of fire sales that would send asset values plummeting anew. Third was the rapid deterioration of financial firms.  Hundreds of smaller banks eventually failed. Bear Stearns, Merrill Lynch, Wachovia, and Countrywide were all close to failure when they were acquired by other financial firms with one or more forms of government support or assistance.  American International Group was rescued directly by the government.  Lehman Brothers did fail, which set off the most acute phase of the crisis.