Governor Daniel K. Tarullo
At the Federal Reserve Bank of Cleveland and Office of Financial Research 2016 Financial Stability Conference, Washington, D.C.
December 2, 2016
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My third suggested consideration in rationalizing the regulatory regime is a caution against being excessively attracted to simple answers to a set of risks posed by complicated and diverse activities. There is no question, in my mind at least, that regulations can become excessively complicated. A prime example is the Basel II approach of basing banks’ capital requirements on their internal models. It is exceedingly difficult and costly for supervisors to validate those models rigorously and, even so, the potential remains for intentional or unintentional mistakes that are hard to detect in a timely manner. But this example does not mean that the simplest possible regulation is always optimal.
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But I do not think there is a sound economic case for generally weakening the regulatory requirements applicable to the largest banks. And I certainly do not think the taxpayers should bear the risk that would be entailed by any such weakening.
