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Aggressive Fed Regulator Daniel Tarullo to Step Down in April

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Janet Yellen, Chair of the Fed, and Daniel Tarullo (right) at a Fed meeting. Mr. Tarullo has been the Fed's point man on financial regulations.

The main force behind intensive banking regulations in recent years is stepping down to pave way for Trump appointee.  "Zombie banks."

Daniel Tarullo, the heavy-handed Fed governor who has been a nightmare for the U.S. banking system, will be resigning his board seat in April he wrote in a letter to President Donald Trump last Friday.  Mr. Tarullo's resignation was not a surprise given the election of a president who has made it very clear that he plans to reduce government regulations.

With two of the seven board seats already vacant, the resignation of Mr. Tarullo, an Obama appointee, will provide President Trump with an even greater opportunity to reshape the Fed's regulatory and monetary policy agenda for years to come.  Although Mr. Trump has made very clear his views on government regulation and its affect on the U.S. economy he has not said a lot about his views on monetary policy other than to say he does not plan to reappoint Janet Yellen as Fed chair. 

Since expanding the Federal Reserve's regulatory powers under the Dodd-Frank Act, signed into law by then President Obama in 2010, the Fed has gone on a rules-making war path forcing the nation's largest banks into government compliance mode and many regional and community banks out of business.  Citigroup alone had some 20,000 employees devoted to nothing but regulatory compliance, according to report on Fox Business news.

"If you look at the results of his [Mr. Tarullo] efforts at the Fed on the regulatory side we have large banks that have become Zombie banks they are so massively regulated and then we have smaller banks, the regional and community banks, that have been crushed by the Fed," said David Smick a noted author and financial analyst on Fox Business yesterday.

Mr. Smick also pointed out that before the financial crisis the nation's 12 largest banks controlled 45-50 percent of all banking assets and not that amount is 75-80 percent.  "They consolidated these banks and made them risk-averse," said Smick.  The combination of heavy government regulation and ultra-low interest rates by the Fed in the past eight years have dramatically altered the free flow of capital and the overall credit landscape.

Compliance departments in banks such as JP Morgan Chase, Wells Fargo and Citigroup have complained that the Fed has been very arbitrary in setting rules, particularly in the stress tests, and that once a bank would make policy and operational adjustments to one set of rules they would suddenly change overnight.  Burdensome regulations by the Obama Fed were one of the main reasons why many on Wall Street supported Mitt Romney for president in the 2012 election after having supported Obama in 2008.

The anticipated wave of bank deregulation under President Trump will place the burdens of credit risk and loan integrity back on the banks.  "It doesn't mean that we want to go back to a system in which the taxpayer is the lender of last resort," Mr. Smick emphasized near the end of his interview.  "That's why we need some really smart people to find the right balance."