Faculty Bibliography

In a number of important cases restricting the authority and independence of federal agencies, the Supreme Court’s conservative majority has adopted reasoning that, if applied consistently, could have more far-reaching consequences for the administrative state. To explore the limits of the Court’s evolving doctrines, this Article shows how their application might lead to a conclusion that the structure or mandate of the Federal Reserve, as created by Congress, is unconstitutional. On the assumption that at least some of the conservative Justices would not want to reach this result, the Article goes on to survey strategies available to the Court for avoiding such an outcome. It explains how, if a constitutional challenge to the Federal Reserve were to reach the Court, its choice among these strategies would further delineate the reach of its campaign against the administrative state. Even in the absence of an actual challenge, this exercise reveals how the Court’s political philosophy is shaping its jurisprudence.

U.S. banking regulators have considerable discretion in developing and enforcing prudential rules. Regulators have also enjoyed wide discretion in exercising supervisory authority over banks, in order to guard against potential safety and soundness risks that are not covered by the rules. However, recent developments in U.S. administrative law may create some conflict with that broad discretion. Whether or not this conflict comes to pass, a form of judicial review that focuses less on individual supervisory actions, and more on the overall framework within which the supervisory function is carried out, is a more promising way to achieve the administrative law aims of fairness and consistency.

The Federal Home Loan Banks (FHLBs) are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide an incentive to take advantage of the considerable public privileges from which they benefit—including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed by Fannie Mae and Freddie Mac before the Global Financial Crisis. This article examines past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.

Daniel Tarullo explores several proposed modifications to capital regulation (specifically, the eSLR and G-SIB capital surcharge) that could ease constraints on banks holding and trading Treasuries without endangering the foundations of the post-Global Financial Crisis reforms.

Even in a period of relative economic calm, a bank less than one-tenth the size of JPMorgan Chase was not allowed to fail without some special protection for one group of creditors — those large, uninsured depositors.

This Article presents a systematic consideration of how administrative law doctrines apply to banking supervision, an unusual form of administrative practice that rests on an iterative relationship between banks and supervisors. First, it describes the rationales for, and process of, bank supervision. Second, this Article uses recent administrative law arguments lodged by banking interests against key supervisory practices as the springboard for an analysis of why our largely “trans-substantive” administrative law can be problematic in the context of specific mandates given by Congress to administrative agencies. It argues that courts considering how administrative law doctrine applies to agency practices must contemplate more fully the substantive law the underpins the mission and organization of the agency. When these statutory provisions are taken appropriately into account, arguments that supervisory practices are consistent with administrative law requirements are substantially strengthened. Third, this Article demonstrates how even a more tailored application of contemporary administrative law doctrines would miss a critical feature of banking supervision—that it is premised on an ongoing relationship between banks and supervisors. Judicial review of agency action usually focuses on discrete agency actions, thereby eliding this critical fact. As a result, administrative law doctrines such as the “practically binding” test for agency guidance are peculiarly inapposite. Lastly, this Article offers a tentative proposal for shifting the administrative law review of supervisory actions to focus on how banking agency processes manage the iterative nature of the supervisory relationship.

The Federal Home Loan Banks are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide the incentive to take advantage of the considerable public privileges from which they benefit – including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed before the Global Financial Crisis by Fannie Mae and Freddie Mac. This paper examines the past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.

Financial market turmoil from COVID highlighted continuing risks to financial stability posed by non-bank financial intermediaries. While there are grounds for optimism that the SEC will finally take the macroprudential regulatory role it has been reluctant to play in the past, obstacles remain.

We propose a congruence principle for financial regulation. Application of this principle would enable regulators to use economically similar instruments across multiple domains to manage systemic risk. We present case studies of market malfunctions that occurred when congruence was ignored: nonprime mortgage finance (in 2008 and 2020) and United States Treasury securities (in 2020). In these cases, risk built up in non-bank financial institutions due in part to regulatory arbitrage. Under a congruence principle, regulators could mitigate this risk using a coordinated combination of capital requirements, minimum haircuts on repo transactions, and margining rules on futures exchanges and central clearing parties.

The financial crisis considerably strengthened the case for a “macro-prudential” component in financial regulation – that is, regulatory measures developed and implemented with a view to the stability of the financial system as a whole, rather than with sole attention to the circumstances of individual financial firms. Of particular conceptual appeal are time-varying measures that would discourage the creation of excessive risk, or at least augment the resiliency of firms and markets that could suffer greater losses in periods of economic or financial stress. Unfortunately, the analytic, political and practical hurdles to imposing effective time-varying measures during good times – whether through rules or discretionary action – are substantial. And, during periods of stress, market forces may demand that firms maintain fortress balance sheets, thereby thwarting the macro-prudential aim of allowing those firms to support economic activity through new lending that reduces capital levels and draws down liquidity reserves. This short paper examines these challenges through two examples – counter-cyclical capital requirements and the liquidity coverage ratio. It also suggests an approach that might begin to overcome these challenges, tough only partially and only for macro-prudential measures that increase regulatory requirements. The problem of market constraints on macro-prudential relaxation of requirements remains a problem.

A decade after the darkest moments of the financial crisis, both the US financial system and the legal framework for its regulation are still in flux. The post-crisis regulatory framework has made systemically important banks much more resilient. They are substantially better capitalized and less dependent on runnable short-term funding. But the current regulatory framework does not deal effectively with threats to financial stability outside the perimeter of regulated banking organizations, notably from forms of shadow banking. Moreover, with the political tide having for the moment turned decisively toward deregulation, there is some question whether the resiliency improvements of the largest banks will be preserved. This article assesses the accomplishments, unfinished business, and outstanding issues in the post-crisis approach to prudential regulation.

Real world crises have a way of shaking up the intellectual foundations of policy disciplines. Some ideas, such as the efficient markets hypothesis, have taken some hits, as others have risen to prominence. An example of the latter is the view that financial stability must be an explicit economic policy goal. A corollary of this view is that a "macroprudential" perspective -- generally characterized as focused on the financial system as a whole as opposed to the well-being of individual firms -- should be added to traditional prudential regulation. A macroprudential reorientation of the bank regulatory policies will require a range of continuing work on resiliency, on other structural measures, and on the effective blending of macroprudential with traditional microprudential regulatory and supervisory policies. But, even as you make more progress in these areas, your efforts will not be complete without measures addressing what the author has termed an accelerant of systemic problems.

The turmoil in financial markets that resulted from the 2007 subprime mortgage crisis in the United States indicates the need to dramatically transform regulation and supervision of financial institutions. Would these institutions have been sounder if the 2004 Revised Framework on International Convergence of Capital Measurement and Capital Standards (Basel II accord)--negotiated between 1999 and 2004--had already been fully implemented? Basel II represents a dramatic change in capital regulation of large banks in the countries represented on the Basel Committee on Banking Supervision: Its internal ratings-based approaches to capital regulation will allow large banks to use their own credit risk models to set minimum capital requirements. The Basel Committee itself implicitly acknowledged in spring 2008 that the revised framework would not have been adequate to contain the risks exposed by the subprime crisis and needed strengthening. This crisis has highlighted two more basic questions about Basel II: One, is the method of capital regulation incorporated in the revised framework fundamentally misguided? Two, even if the basic Basel II approach has promise as a paradigm for domestic regulation, is the effort at extensive international harmonization of capital rules and supervisory practice useful and appropriate? This book provides the answers. It evaluates Basel II as a bank regulatory paradigm and as an international arrangement, considers some possible alternatives, and recommends significant changes in the arrangement.

In the eighty years since Alexander Sack coined the phrase "odious debt," academics and activists have periodically rediscovered Sack's idea, often arguing for its application or extension-to this point, in vain. Here, Tarullo reveals the degree to which current interest in the problem of odious debt is intertwined with other problems that strike more critically at the well-being of developing-and emerging-market countries. He reasons that the necessarily complex effort needed to institutionalize a doctrine of odious debt is a potentially effective organizing principle for generating the political will to address these other persistent, debilitating problems.

Why Doha will be the last of the grand multilateral trade negotiations.

The growing importance of international economic transactions for economic activity as a whole has given rise to an increasing number of proposals for arrangements to govern those international transactions. Many, if not most, of these proposals raise important policy issues, on which there is frequent disagreement among and within countries. Quite apart from political or policy controversy, however, many proposals for international economic arrangements are analytically flawed in one of several common ways. They may draw false analogies from domestic to international circumstances. They may elide the possibility that the accommodation of many national political and legal systems in a single international arrangement will force compromises that create more problems than they solve. They may be offered without sufficient attention to the institutional features of international arrangements that can distort or otherwise modify the intended outcomes of the arrangement. In this article I elaborate the last of these points in the specific context of proposals to give the International Monetary Fund ("IMF" or "Fund") a greater role in sovereign debt restructuring. As has often been noted, the role of the IMF changed dramatically towards the end of its third decade in existence. Yet the fundamentally political nature of Fund operations has remained constant. The fact that the Fund has a highly professional and sizeable staff might have been expected to lend the organization a more technocratic character. Indeed, everything from the quality of its publications to the feel of its headquarters suggests just that. However, as Part II will show, both the history of its creation and the reality of its operations show that the IMF is, at its core, a political institution. In Part III, I show-by way of example rather than comprehensive analysis-how the political foundation of Fund governance affects a range of proposals to reform the process of sovereign debt restructuring. In many cases the IMF decision-making process may produce outcomes neither intended nor, in some instances, anticipated by reform proponents. The point here is not to endorse or reject any of these proposals but to underscore the perils of ignoring so critical an institutional characteristic. Concluding in Part IV, I suggest what the political foundation of IMF governance does, and does not, imply for reforming sovereign debt restructuring.

Virtually every national trade remedy measure challenged in WTO dispute settlement has resulted in at least partial victory for the exporting country. In the anti-dumping area, the special standard of review for national interpretations of Anti-Dumping agreement obligations has had little discernible effect on dispute settlement outcomes. This pattern, while applauded by some as promoting liberal trade values, may actually result in less trade liberalization. If important trading countries like the United States believe that the Appellate Body will undermine provisions intended to preserve their ability to use trade remedies, they may decline to negotiate further disciplines on the use of these remedies or, possibly, to enter multilateral negotiations entirely. Although insufficient information exists to reach definitive conclusions, recent developments suggest that such negative effects are occurring in the Doha Round.

Proposals to reform the ‘international financial architecture’ in the wake of the global financial crisis of 1997–98 echo the traditional debate over the merits of rules versus discretion in the administration of government functions. Proposals for rules‐systems to govern International Monetary Fund (IMF)assistance and for international bankruptcy regimes promise solutions to the problems of moral hazard and collective action that contribute to financial crises, but they disregard key financial market characteristics and the differences between regulating sovereigns and private market actors. The official reform agenda eschews the rigidities of rules‐systems in favor of a mix of reforms initiated without basic changes in relevant international and national legal rights and obligations, in a way that parallels central bank policies in containing domestic financial crises. The differences in authority and credibility between national central banks and the IMF make this policy of discretionary eclecticism suspect in an international context, validating to some degree the concerns of the rules‐proponents. While some alternative approaches try to blend elements of rules‐systems and discretionary judgment, none appears likely to bridge this authority gap successfully. This circumstance reflects the problems of regulating global economic activity in a world of nation‐states and suggests that the world will remain vulnerable to damaging financial crises in the future.

Over the last several years, a chorus of voices have called for international action in the area of competition policy. A good deal of dissonance, however, can be discerned among these voices. Most who have joined in share at least a stated commitment to promoting competition principles, as embodied in the antitrust laws of many countries. Yet their policy prescriptions differ dramatically, as evidenced by the divergent views of the United States and Europe. The European Commission proposes that the member states of the World Trade Organization (WTO) negotiate a binding competition code. The United States has rejected this idea and counterproposes increased bilateral cooperation between national competition authorities and continued study of the issue. Of course, national differences may arise as much from negotiating tactics as from disagreement on the analytics of which kind of arrangements are most likely to advance competition principles; but for those interested in law and policy, these analytics should be central to choosing among varying proposals. Since competition policy was one of the many issues left unresolved by the failed Seattle ministerial meeting of the WTO in late 1999, and will surely be revisited, how and why certain institutional configurations advance or retard agreed policy aims are questions ripe for attention. The answers will help define the possibilities for competition policy in an era of globalizing markets and contribute to a broader debate over the limits of trade policy in reconciling national economic policies.

Discusses the failure in the negotiations initiated by the World Trade Organization ministerial meeting in Seattle, Washington. Problems in the world trading system; Fissure between developed and developing countries; Disagreements in issues such as labor and environmental standards.

Proposals for international action on competition policy respond to four problems: increasing transnational anti-competitive activity outside control of any single nation, enforcement conflicts, market access problems, and unnecessary costs of compliance with multiple national regimes. All four are real, but limited, problems, though transnational anti-competitive activity could be very significant in the future. A competition code in the WTO would process competition problems principally as market access problems. The resulting arrangement would address market access problems imperfectly, and the other three problems not at all. International initiatives in this area must facilitate cooperation among competition authorities. The best approach is to pursue a mix of bilateral, OECD, and WTO initiatives which places protection of consumers from anti-competitive activities at the center of international efforts.

Examines the need for new international arrangements with the advent of a single European currency. Key points in the European Union's proposal on external representation of the euro; National representation in international economic organizations where member states are clearly defined as competent counterparts to non-European countries; Bifurcation of the G7 into a monetary and financial G3.

Deals with the November 1999 meeting of the World Trade Organization in Seattle, Washington. Start of the next round of global trade negotiations; Debate on whether trade sanctions should be imposed on countries that do not enforce minimal labor standards; Policy, political, and practical limitations; Concerns raised about the possibility of a backlash against globalization.

Op-Ed article by Daniel K. Tarullo, senior fellow of Council on Foreign Relations, says that Pres. Clinton was right in calling for urgent steps to stem global financial meltdown during meeting of International Monetary Fund and World Bank but that his suggestion for new global financial architecture risks diverting energy from short-term efforts to get devastated Asian economies growing and contain spread of problems.

Op-Ed article by Daniel K Tarullo, Pres. Clinton's former economic policy aide, holds Japanese Prime Min Ryutaro Hashimoto's belated economic stimulus program will not alone spur sustained growth; urges United States and Japan's other economic partners to press Hashimoto at Group of Seven meeting for financial reform and deregulation of domestic markets.

Since World War II, tariffs have become less important and two other types of laws - market correction statutes and protected adjustment statutes - have assumed preeminent roles in the regulation of international trade. In this Article, Professor Tarullo finds that both types of laws are based on a "normal" conception of governmental noninterference in the market. The Article examines these laws in light of their stated purposes, as well as in relation to values of fairness and democratic participation. The market correction laws, justified by an efficient-market rationale, in practice fail to promote the goal of economic efficiency. In addition, these laws are undemocratic in operation and often unfair to both workers and consumers. The protected adjustment statutes are desirable models for trade regulation, but the strict causation test and the nature of the executive role in the present laws prevent these statutes from effectively furthering their supposed aims of (1) adjustment of domestic capital and labor to new conditions of import competition and (2) redistribution to these factors of production. These flaws also make these statutes unfair to displaced workers and undemocratic. The Article concludes by proposing a four-part solution to the problems present in the American system of trade regulation: (1) elimination of the market correction laws; (2) revision of the causation test in the protected adjustment statutes; (3) creation of a monetary entitlement for workers displaced by imports; and (4) creation of local adjustment councils.