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Financial stocks spike on US Fed regulatory chief’s plan to resign

Four minutes after Federal Reserve Governor Daniel Tarullo said he will resign, some investors were simply told, Buy banks

Financial stocks took a leg up after news that the US Federal Reserve’s toughest watchdog on the industry resigned. The Financial Select Sector SPDR ETF gained as much as 0.6% on 10 February, after Federal Reserve governor Daniel Tarullo announced he will retire on or around 5 April. Tarullo, who started his term a week after Barack Obama took office, also served as the central bank’s top regulator of Wall Street banks. The 64-year-old’s stint as governor wasn’t due to expire until 2022.

The policymaker was the point man in the development of new rules and regulations to safeguard the financial system in the wake of the 2008 financial crisis, and drew praise from Fed Chair Janet Yellen for his efforts. President Donald Trump has vowed to roll back financial regulations.

In a note to clients four minutes after the announcement, Neil Dutta, head of US economics at Renaissance Macro Research, said simply, “Buy banks."

Financials stocks spiked before coming off their intraday highs.

“Tarullo is a bank regulator and the perception in the marketplace, rightly or wrongly, is that he is for tighter regulatory oversight and lower margins in the banking business," Dutta wrote. “Someone with more lax attitudes on regulation is likely to come out of this. Buy banks—the dog is running without its leash on."

Daniel Tarullo had spearheaded the push to make banks safer after the 2008 financial crisis.

As the Fed governor who handled regulation, Tarullo often took the lead in implementing new rules and in defending the government’s response to the crisis before Congress. Because he earned a reputation as one of the toughest supervisors of banks, the industry quietly welcomed news of his resignation.

Tarullo’s departure means Trump will soon get to fill three of the Fed’s seven board positions, as there are two existing vacancies.

All governors have votes on the Federal Open Market Committee that sets US interest rates. In addition, Janet Yellen’s term as chair expires in February 2018, followed by Stanley Fischer’s term as vice-chair in June of next year.

The openings give Trump the chance to significantly put his stamp on the world’s most powerful central bank.

Tarullo weighed leaving for a couple of years before deciding in the fall that he’d go “regardless of the outcome of the election," he said in an interview.

As for his singular influence in crafting banking regulations, he said “no one person is of particular importance in any of this; It was a group effort to get these in place."