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Are Treasury and the Fed at Odds Over Big Banks?

National Journal

Treasury Secretary Jacob Lew has been cagey about whether he thinks Wall Street's giant banks are getting dangerously large and out-of-control once again, as many experts believe. But at a hearing on Capitol Hill this week, Lew gave the clearest indication yet that he's not especially worried and is going to take the light-fingered approach of his predecessor, Tim Geithner—and that he doesn't appear to agree with recent Federal Reserve proposals to correct the "too big to fail" problem.

Asked at a Senate Banking Committee hearing by Sen. Elizabeth Warren, D-Mass., whether Treasury is "still opposed to capping the size of banks," Lew responded that he did not see a need for additional action beyond implementing the Dodd-Frank regulatory law, which attempts to set orderly procedures for the liquidation of even the largest banks if they get into trouble. "This is not the time to be enacting big changes to Dodd-Frank or to the regulatory system," Lew said. After Dodd-Frank is implemented, he said, he'll "take stock."

That would seem to put Lew at odds with Federal Reserve Governor Dan Tarullo, who in recent months has floated a number of proposals to further shrink the banks, a problem that he says "seems to inexorably call for a set of complementary policy measures" to Dodd-Frank. In a series of speeches, Tarullo has proposed limiting the expansion of big banks by restricting the funding they get from sources other than traditional deposits, and adding liquidity and capital requirements that will make it more expensive and burdensome to be too big.

Government sources familiar with the Tarullo proposals say the Fed has not received a positive response from the Treasury Department about them, and Lew's remarks at the hearing perhaps help to explain why.

Tarullo, who was appointed by Obama, has often reflected the views of Federal Reserve Chairman Ben Bernanke and other Fed officials, including Federal Reserve Bank of Dallas President Richard Fisher, a noted critic of the too-big-to-fail problem and Dodd-Frank's deficiencies. Fisher, a conservative, said at a speech in March that "a dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry" and pose a huge danger to the future of the economy. Dodd-Frank, he said, "is, despite its best intentions, counterproductive and needs to be changed."

During her questioning, Warren—known as one of the most progressive voices in Washington on reining in Wall Street—noted that Treasury under Geithner had opposed a 2010 amendment that would have broken up the biggest banks. "Has the Treasury Department's position changed?" Warren asked Lew. He did not respond directly, other than to say he was satisfied to await the implementation of Dodd-Frank as it is.

As detailed in a new National Journal eBook, In Lew of Geithner, Lew is known primarily as a budget expert and has been a virtual cipher on Wall Street-related issues until now, even as the banking lobby actively seeks to open up a plethora of loopholes in Dodd-Frank. But at  his 2010 Senate confirmation hearing to become head of Office of Management and Budget, Lew also indicated that he didn't consider the deregulation of Wall Street to be a "proximate" cause of the financial crisis --an answer that put him at odds with his boss, who declared as a presidential candidate in 2008: "It's because of deregulation that Wall Street was able to engage in the kind of irresponsible actions that have caused this financial crisis."

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