NEW YORK - Facing the elite of the banking industry, pushing back against Dodd-Frank reforms, Federal Reserve Gov. Daniel Tarullo Wednesday said he hopes the momentum for change generated by the crisis is not "redirected."

Tarullo spoke to the Council on Foreign Relations and also, it seemed, past them to the chief executives of J.P. Morgan, Goldman Sachs, Morgan Stanley, Bank of America and others at the top of the nation's largest financial institutions. They are pressing their objections to several reforms Tarullo is in charge of developing for the Fed in a meeting later in the day.

"It is sobering to recognize that, more than four years after the failure of Bear Stearns began the acute phase of the financial crisis, so much remains to be done," Tarullo said in his prepared remarks.

"For some time," he continued, "my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed." This, he said, "remains a very real concern."

The top tier of the banking industry made it clear it is very concerned that what they consider the worst of the regulations will go into effect. Their industry organizations, the American Bankers Association, the Financial Services Roundtable and SIFMA among them, served their objections on the Fed in letters arguing against what they consider some of the worst proposals.

Tarullo asked for a meeting and J.P. Morgan CEO Jamie Dimon organized the gathering of his peers. A particular target of the banks is a proposed rule that would, in two years, limit net credit exposures between any two of the top financial institutions to just 10% of an individual bank's regulatory capital.

Before facing the bankers, Tarullo set out his position as a regulator faced with huge challenges and, as evidenced by the organized opposition, little industry support.

After recounting the history of post-crisis reform, Tarullo listed the categories of reform still taking shape. Too-big-to-fail banks, strengthened capital requirements and the identification of the most important institutions to the financial system are projects under way.

"The banking agencies have been working simultaneously on all the implementing regulations so that we can take into account the interrelationships among the various rules," he said. "As we publish proposed and final regulations in the coming months, banks will have a complete picture of the capital requirements to which they will be subject."

It's necessary to define the best way to orderly liquidate a huge financial institution, with all its links to the rest of the system, so that shareholders and long-term creditors won't act like "they effectively hold a put option because of a belief the government would bail out a large firm" to prevent bigger problems, he said.

"The capital and liability structure of major firms must be able to absorb losses without either threatening short-term funding liabilities or necessitating injections of capital from the government," he said.

A fifth set of reforms is those governing quantitative liquidity requirements, an area where progress is being postponed for "further examination and possible revision" internationally, he said.

For now, Tarullo focused on two areas "where the case for reform in the short run is compelling." The vulnerabilities of money market funds, which include "the lack of loss absorption capacity" and the way institutional investors "run together make a clear case that (SEC) Chairman Schapiro is right to call for additional measures."

Like Tarullo, the SEC chair is the target of an industry that believes enough has been done to assure their survival under stress.

Another area where there is a need for action soon is the tri-party repo market, he said. "A major vulnerability lies in the large amount of intraday credit extended by clearing banks on a daily basis," Tarullo said. "An industry initiative to address the issue led to some important operational improvements to the tri-party market, but, to be rank, fell short of dealing comprehensively with this problem."

Now regulatory agencies have to "take appropriate regulatory and supervisory measures to mitigate these and other risks."

He said that the negative side of regulation, the injunctions to the financial system on what not to do, have to be balanced by "a better articulated view of what we do want them doing." 

He gave as an example, housing finance, that is not working as it should despite many fixes of its weakest links. "We must also recognize," he said, "that there is not currently in place an effective system for funding well-underwritten mortgages."

"To return to, and maintain, a healthy housing market, we will need a healthy system of mortgage finance," Tarullo said.

A "critical issue," he said, "is the future of the government-sponsored enterprises," but there also should be a broad public policy debate "focused on the cost, availability and risks associated with mortgage financing that will likely be available under possible combinations of government policies," he said.

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