Daniel K. Tarullo, the Fed governor, oversaw the stress tests of 19 banks and the tightening of oversight by Fed regulators across the country.
WASHINGTON — As finishing touches are put on the most comprehensive rewriting of financial rules since the Depression, a 57-year-old former law professor is emerging as one of the most influential financial regulators in the United States.
For all the criticism of the Federal Reserve for failing to anticipate and prevent the financial crisis, the central bank and its chairman, Ben S. Bernanke, are emerging with vast new responsibilities to safeguard the financial system.
Alongside Mr. Bernanke is Daniel K. Tarullo, who was President Obama’s first appointment to the central bank’s board of governors, and who believes that re-engineering the regulatory system could soften the blow of a future crisis.
“I would characterize my aspiration as follows,” Mr. Tarullo says in his characteristically professorial tones. “That the regulatory and supervisory reforms we undertake will significantly reduce the incidence and severity of financial crises.”
That is hardly a modest aim. Then again, the legislation on Capitol Hill envisions the Fed as a kind of supercop for the financial system, a backstop against the kind of extreme risk-taking that produced the financial crisis that reached a peak in 2008.
“We need to do more than adjust our regulatory system,” Mr. Tarullo said in an interview at the Fed’s headquarters. “We really need to redesign the system, but in doing so, to draw on regulatory tools that have developed over the years.”
Mr. Tarullo, who blends an expertise in economic regulation with a passion for Faulkner and Eliot, took office eight days after Mr. Obama did, as the economy was reeling from the aftershocks of the crisis. He quickly won the confidence of Mr. Bernanke.
He helped oversee stress tests of the 19 largest bank holding companies, which helped them to raise capital and regain investor confidence. And then he set out to tighten the way the Fed’s 2,800 bank regulators and supervisors around the country oversee 5,800 financial institutions, large and small.
The effects of Mr. Tarullo’s influence are rippling through the Fed and the banking industry. Within the 12 Fed districts, there is a greater awareness of scrutiny from Washington.
Mr. Tarullo is overseeing a review of bonuses and pay practices at 28 banks that is expected to be released shortly. And he has put in place two new regulatory approaches: reviews that look at risk-taking across banks, not just individual institutions; and quantitative surveillance, which marshals the Fed’s statistical powers to “identify developing strains and imbalances” across the financial sector.
The new faith in regulation, which is shared by the Obama administration, has its skeptics, even within the Fed. On Thursday evening, Richard W. Fisher, the outspoken president of the Federal Reserve Bank of Dallas, warned that regulation could do only so much.
“The industry is unfortunately evolving toward larger and larger bank size with financial resources concentrated in fewer and fewer hands,” he said, adding, “We must cap their size or break them up — in one way or another shrink them relative to the size of the industry.”
But for now, the Fed and the Obama administration are siding with Mr. Tarullo’s approach, which sees breaking up banks only as a last resort. Last year, after the Fed’s director of supervision and regulation, Roger T. Cole, retired, Mr. Tarullo replaced him with a longtime Fed economist, Patrick M. Parkinson, who had been helping the Treasury Department devise the regulatory overhaul the administration would present to Congress.
The blueprint was the basis for the legislation approved by the House and Senate, which is about to be merged by a conference committee.
Mr. Tarullo is also crucial in talks over the updating of the international rules that set out the minimum levels of capital large banks must hold. How those requirements, known as the Basel standards, are determined and enforced, will have a big effect on global financial stability.
It all amounts to a greater role for regulators, whose failings were apparent in the last crisis.
“Understandably, there is some hesitancy to leave too much to the discretion of regulators, because regulators did not do a great job before the crisis,” Mr. Tarullo said. “But that consideration is balanced to some degree by a concern that if you specify rules or outcomes based solely on current circumstances, then three or five years from now, they may not be effective.”
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