What is the Federal Reserve's governance structure?
The Federal Reserve System is a public-private, decentralized institution designed nearly 100 years ago by Congress after six years of public debate. The public component is the government agency, the Board of Governors in Washington, D.C. The private component is the 12 regional Reserve Banks and their Branches located throughout the country and overseen by private citizens who serve as directors.
Can't these responsibilities be better handled entirely by a government agency?
The separation of the authority over spending (Congress) from authority to regulate the money supply (Federal Reserve) is essential to insulate policy decisions from short-term political pressures related to election cycles and maintain the focus on long-term stability. Congress created the Fed as an independent institution that is accountable to Congress. Governors of the Federal Reserve System are appointed by the President and confirmed by the Senate to serve 14-year terms. The Board of Governors has broad oversight of the regional Reserve Banks.
Who are the directors?
Reserve Bank directors come from diverse backgrounds within every region of the country and every sector of the economy. They meet legal requirements and practices that guide their eligibility and conduct, and are held accountable by law.
Don't directors of the regional Reserve Banks naturally have conflicts of interest as private business people?
Through the Federal Reserve Act, Congress put in place long-time provisions governing director eligibility and selection, in addition to requirements that dictate the makeup of regional Reserve Bank boards. The Federal Reserve Board recently strengthened its rules to address Reserve Bank director eligibility in light of recent changes in status of affiliated financial firms.
How do directors assume their positions?
Each Reserve Bank has nine directors:
- Three directors, including the chair and deputy chair of each Reserve Bank board are appointed by the Board of Governors, the government agency. These directors are prohibited from any involvement in banking.
- Three directors, who are similarly restricted and may not be bankers, are elected by bankers from within their respective Federal Reserve district. These directors have no reporting responsibilities to any banks.
- Three directors are bankers who are elected by their peers. Regulations mandate that smaller banks must hold two of these seats.
Would the bankers who serve as directors have conflicts?
Reserve Bank directors have important oversight responsibilities for the operation of their respective Reserve Bank. However, they have absolutely no role in banking supervision. By law, the Board of Governors is responsible for the supervision of banks and any information or discussion related to supervisory issues moves directly between a regional Reserve Bank’s staff and the Board in Washington, D.C. In regard to the Fed’s important discount lending activity involving financial institutions, directors are provided only aggregate information to ensure adequate knowledge of the Reserve Bank’s balance sheet and to meet their oversight responsibilities.
The Federal Reserve supervises all bank holding companies, so directors can’t put their own firm under Fed supervision for favorable treatment. If a bank director does want to convert their firm to Fed membership or take any other actions that would involve Fed approval, the Board of Governors in Washington is the entity that must act on the proposal.
Why is it important to have a banking perspective on a Reserve Bank’s board?
Bankers are desirable directors because they are leaders in their communities and provide the Fed with valuable information on the economy, banking conditions and stress in the financial system. In addition, because the Reserve Banks provide financial services and products to facilitate and backstop the nation’s payments system, bankers provide valuable expertise for the Fed’s work in this area.
The Reserve Bank’s Board of Directors appoints Reserve Bank presidents: Isn’t it a bad idea to have private citizens appointing other private citizens to positions that play such an important role in national policy?
The Class B and Class C Reserve Bank board members select the Reserve Bank president, but the selection must be approved by the Board of Governors in Washington, D.C., which holds veto authority.
Like the rest of the Fed’s structure, the process of selecting a president involves important checks and balances. The structure of the Federal Reserve is a product of the populist movement—citizens wanted direct input and representation to counterbalance the powerful influence that Wall Street and Washington could have on the financial system. In this regard, Congress clearly supported the need to protect individuals who hold these posts from political concerns related to election or political appointment.