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The Deal: Tarullo Overlooked in Race to Head Fed

Nevertheless, Tarullo has outlined a long-list of regulatory initiatives for reform and his departure would raise questions about the central bank's direction and whether his items would receive any priority if he departs.

For example, the Fed governor is a leading advocate for a controversial leverage ratio proposal introduced by regulators in July requiring big banks to hold significantly more equity against their total assets than currently recommended by international bank capital guidelines. The proposal, once adopted, could require large financial institutions to raise billions in additional capital or divest assets to meet the requirement. People tracking the Fed's deliberations argue that Tarullo worked hard to bring the measure to fruition by getting some reluctant Fed governors to back it. Backers hope the Fed will adopt the limit before Bernanke leaves, which is expected at the end of the year.

He also appears to support the concept of "bail-in" capital, that would have big banks hold a special kind of capital that would act like debt in good times, but convert into common equity in a crisis. The idea would be for big banks to provide their own life support in a crisis.

"The concept of bail-in capital appears to have substantial intellectual appeal to Tarullo," said John Dearie, a former Fed official who is now an executive vice president of the big bank lobby group, the Financial Services Forum.

The Fed governor also is an eager advocate to hike capital requirements for large firms that substantially depend on short-term funding. Recently, the Fed governor noted that letting banks rely on short term funding played a substantial role in the 2008 collapse of Lehman and Bear Stearns.

Another initiative on Tarullo's agenda: The so-called Volcker Rule. Named after former Fed chairman Paul Volcker, the measure would prohibit big insured banks from trading derivatives and stocks with their own money. It also requires banks to cut their holdings in new hedge funds and buyout shops down to 3% within a year. Tarullo has pushed for a tough rule, according to people familiar with the Fed, but so far the provision has become bogged-down with inter-agency disputes.
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