The failure of the Silicon Valley Bank has brought attention to the relationship between the San Francisco Fed, which was responsible for overseeing the safety and soundness of financial institutions, and the bank’s former chief executive, Greg Becker. many years He was a member of the board of directors of the San Francisco Federal Reserve Bank.
The March 10 bank failure sparked criticism of the Fed. Banking regulators were slow to detect and stop problems before Silicon Valley banks suffered a catastrophic financial crisis that required an all-out government response.
When Becker testifies before the Senate Banking Committee on Tuesday about the Silicon Valley bank failure, he could be questioned by lawmakers about the role of his board and whether it has become too close to regulators. have a nature.
Becker’s position on the San Francisco Fed’s board would have given him little formal authority, according to current and former Fed officials and officials. Each of the Fed’s 12 Reserve Banks (semi-private institutions scattered across the country) has a nine-member board of directors, three of whom come from the banking industry. Those boards have Not say He primarily serves as an advisor to the Fed’s leadership in the area of banking supervision.
But many agree that the setup created an impression of coziness between the SVB and the Fed. Some outside pundits and politicians are beginning to question whether the way the Fed has been organized for more than 100 years makes sense today.
“They are like a glorified advisory board,” says Caleb Nygaard, a central banking researcher at the University of Pennsylvania. “In good times it can cause severe headaches, and in worst cases it can lead to fatal aneurysms.”
The history of the Federal Reserve Board dates back to 1913.
While regional Fed presidents and other officials have a limited role in banking supervision, and it is largely within Washington’s jurisdiction, some critics question how the supervisors of the San Francisco Fed I’m wondering if it’s doing its job. Failed effective policing Silicon Valley Bank is partly because the Reserve Bank has a close relationship with the bank’s CEO.
And some asked why banks have representation on the Fed’s board of directors.
The answer is tied to the history of the Fed.
When Congress and the White House created the Federal Reserve in 1913, they were skeptical about giving the government or the private sector unilateral power over the nation’s money supply. So they compromised. They created a public Fed board in Washington, alongside quasi-private reserve banks across the country.
These Reserve Banks, which eventually totaled 12 Reserve Banks, would be set up like private companies with banks. as their shareholder. And like any private company, it will be overseen by a board of directors that includes bank representatives. Each Fed Reserve Bank has nine board members or directors. 3 of them Some participants come from banks, but others come from other financial companies, companies, labor and community organizations.
Former New York Fed President William Dudley said, “The Fed’s structure is the way it is because of how the Fed was founded in 1913.” said he was acting as an adviser to Groups focused on operational issues such as banking issues and cybersecurity.
The board may grant benefits to members.
Several former Fed officials said bank-related board members provide a valuable function of providing real-time insight into the financial industry. And the 10 current and former Fed officials interviewed for this article agreed on one point: these boards have relatively little official authority in modern times.
While they voted for rate changes that used to be important at the Fed, Discount rate — that role has become less important over time. The Fed’s president is elected by board members, but since the Dodd-Frank Act of 2010, board members tied to banks have not been allowed to vote.
But according to Aaron Klein, who was then the Treasury Department’s deputy assistant secretary for economic policy and who worked closely with him, the law was criticized for lobbying to keep bank representatives alive. It is said that it has not reached the point of completely excluding it from. About the enactment of laws.
“Neither the Fed nor the bankers wanted that,” Klein said.
From a bank’s perspective, a board position brings prestige. Regional Fed directors stand shoulder-to-shoulder with other banks, regional leaders, and influential central bankers.
It may also provide the benefit of factual or perceived information about the economy and monetary policy. Although the discount rate is less important now, some regional bank directors are given economic clarification when making decisions.
Regional board discount votes have been seen as a kind of weathervane that shows how local bank management thinks about policy, but this is a sign that directors are willing to pay the key interest rate, the federal funds rate. What the Fed uses to guide the speed of the economy.
At a time when Wall Street traders are watching every word Fed officials say about rates, this is remarkable.
“This is very troubling,” said former Minneapolis Fed President Narayana Kocherlakota. “There is no benefit in having them vote on the discount rate.”
Renee Adams, a former New York Fed researcher who studied corporate boards and is now at the University of Oxford, said: I found When a bank executive becomes a director, the news raises the company’s stock price.
“The market believes they have some edge,” he said.
And Board members set aside time to meet frequently with the Fed’s governor, who meets regularly with the board. Mr. Becker must have met with San Francisco Fed President Mary C. Daley at a meeting held about once a month. calendar suggests.
“Director’s leniency” is risky.
Directors associated with the bank have no direct role in supervision and cannot appoint officials related to the supervision of the bank or participate in budget decisions. According to the Fed.
But Klein is skeptical that Mr. Becker’s position on the San Francisco Fed’s board would have been irrelevant in the case of Silicon Valley Bank.
“Who wants to be someone who raises questions about CEOs on their own CEO’s board?” explained that it may not have been applied cleanly to
Adams’ research found that banks with executives on the board actually received fewer enforcement actions (wrist slaps from Fed regulators) during their tenure.
“There may be some directorial leniency,” she said.
Changing the system can be difficult.
This isn’t the first time the Fed’s regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, then-Lehman Brothers chief executive Dick Faldo and former Goldman Sachs board member Steve Friedman were both on the New York Fed’s board.
Fuld resigned shortly before the 2008 collapse of Lehman Brothers, and Friedman resigned in 2009. news flowed He said he bought Goldman Sachs during the financial crisis, when the Treasury Department and the Fed were drawing up plans to strengthen the big banks.
Given these controversies, politicians have occasionally focused on the Fed’s governing board. Democrats included language in their 2016 platform banning financial executives from serving on the Reserve Bank’s board of directors.
And the issue has recently received bipartisan attention. A bill being drafted by members of the Senate Banking Committee would limit directorships to smaller banks, those with less than $10 billion in assets, according to people familiar with the matter.
The committee has Fed Accountability Hearing Scheduled Senator Elizabeth Warren, a Democrat from Massachusetts, and Rick Scott, a Republican from Florida, are planning to introduce legislation ahead of that, according to Warren’s spokesperson.
“It is dangerous and unethical for executives of large banks to serve on the Fed’s Board of Governors, where they may secure preferential regulatory treatment or misuse privileged information,” Warren said in a statement. rice field.
But as the Dodd-Frank bill showed, disempowering the banks at the Fed was a daunting task.
“It’s kind of in the weeds as a political target,” says political scientist Ms Binder.