Periodically, the Federal Reserve’s structure is thrust into the spotlight. Recently, the question of whether it is appropriate for bankers to serve on the boards of the Federal Reserve's regional Reserve Banks has resurfaced.

Let me take this opportunity to better explain the roles—and limitations—of Reserve Bank directors. These individuals, who are respected and engaged community leaders, provide oversight and guidance for Reserve Bank operations as well as grass-roots economic information for Reserve Bank presidents to consider in their congressionally mandated monetary policy responsibilities.

The Reserve Banks’ structure, which includes a nine-member board of directors at each Bank, addresses the Federal Reserve founders’ goal of ensuring that national policy decisions include input from across the entire country. Three of the nine directors at each Reserve Bank are bankers in their respective districts. The six remaining directors represent the public and are not permitted to be bank employees or otherwise be affiliated with a financial company.

Along with the six other directors, the three bankers provide critical, in-depth information about economic conditions in their communities. The banker directors at the Kansas City Fed are closely attuned to the strengths and challenges of their local economies.

While all directors are involved in matters regarding Reserve Bank governance and oversight, they play no part in the Fed’s role in supervising and regulating financial institutions. Decisions and information about supervisory actions are discussed directly between the staffs of the Board of Governors and the Reserve Banks. Directors do not receive this information and do not have any influence over these decisions.

Nonetheless, the standard of conduct for Reserve Bank directors is higher than an actual conflict of interest. The Federal Reserve Board of Governors describes the standard for directors in its Federal Reserve Administrative Manual, found on the Board's website, with the following unambiguous language: "Directors of Federal Reserve Banks and branches, in carrying out their System responsibilities, should avoid any action that might result in or create the appearance of -

  • affecting adversely the confidence of the public in the integrity of the Federal Reserve System
  • using their position as directors, including their access to Federal Reserve officials, for private gain,
  • using their position as a director to influence any supervisory matter (such as an application, formal or informal enforcement action, examination or inspection rating, or the like) involving the institution with which the director is affiliated (through stock ownership, employment, or otherwise)"

Bankers provide valuable banking expertise regarding credit conditions, the payments system and the local economy, and I strongly defend the role of bankers as Reserve Bank directors. I make no accusation of wrongdoing or misconduct in any specific case. However, the standard of conduct is higher than actions alone. In the event that a banker serving on a Reserve Bank board has even an appearance issue arise, then another highly knowledgeable banker can be selected to replace him or her.

Yes, bankers should serve. They provide valuable expertise in credit conditions, the payments system and their local economy. However, when an individual no longer meets the Federal Reserve's high standards, the director resigns, usually voluntarily. When this occurs, another knowledgeable banker is selected to serve.

No individual is more important than the institution.