The collapse of the Silicon Valley bank drew attention to the relationship between the San Francisco Federal Reserve Bank, which was responsible for overseeing safety and security at the lender, and the bank’s former CEO, Greg Baker, who sat for years on the board. Board of Directors of the Federal Reserve Bank of San Francisco.
The collapse of the bank on March 10 drew criticism of the Fed, whose bank supervisors were too slow to spot and stop problems before the Silicon Valley bank hit a ruinous path that required a sweeping government response.
Now, Mr. Baker could face lawmakers’ questions about his role on the board — and whether he created too close a link between the bank and regulators — when he testifies Tuesday before the Senate Banking Committee about the collapse of Silicon Valley.
Mr. Baker’s position on the board of directors of the Federal Reserve Bank of San Francisco gave him little formal authority, according to current and former Fed employees and officials. The Fed’s 12 Reserve Banks–semi-private institutions scattered around the country–each has a nine-person board of directors, three of whom are from the banking industry. These boards have no say in banking supervision, and serve primarily as advisors to the Fed’s leadership.
But many acknowledged that the setup created the appearance of relief between the SVB and the Fed. Some outside experts and politicians are beginning to question whether the way the Federal Reserve has been organized for more than a century makes sense today.
“They’re like a glorified advisory committee,” said Caleb Nygaard, who researches central banks at the University of Pennsylvania. “They cause severe headaches at the best of times, and fatal aneurysms at the worst.”
The Federal Reserve Boards date back to 1913.
In the days after the Silicon Valley bank collapse, headlines abounded about Mr. Baker’s close ties to his bank’s regulator, with many raising questions about a potential conflict of interest.
Although regional Fed chairmen and other officials play a limited role in supervising banks — which is mostly within the purview of Washington — some critics have questioned whether supervisors at the San Francisco Fed have failed to police Silicon Valley. effectively in part because of the Reserve Bank’s close relations with the bank. chief executive officer.
Some have asked: Why do banks have representatives on the Fed at all?
The answer is linked to the history of the Fed.
When Congress and the White House created the Federal Reserve in 1913, they were skeptical of giving the government or the private sector unilateral power over the nation’s money supply. So they bargained. They created the Federal Reserve Public in Washington, along with semi-private Reserve Banks across the country.
Those Reserve Banks, which ended up being 12 in total, would be set up like private companies with the banks as their shareholders. And like other private companies, it will be overseen by boards of directors — those that include representatives from banks. Each Fed Reserve Bank has nine members on the board of directors, or directors. Three of them come from banks, while the others come from financial firms, businesses, and other labor and community groups.
said William Dudley, former president of the Federal Reserve Bank of New York, who said the directors essentially served as a kind of advisory focus group on banking issues and operational issues, such as cybersecurity.
Member councils may grant benefits.
Several former federal officials said the board members associated with the bank provided a valuable job, providing real-time insight into the finance industry. And 10 current and former Fed employees interviewed for this article agreed on one point: These boards have relatively little formal authority in modern times.
As they vote for changes to a once important interest rate at the Federal Reserve — called the discount rate — that role has become less important over time. Board members choose Fed chairmen, although since the 2010 Dodd-Frank Act, directors associated with the bank have not been allowed to participate in those votes.
Aaron Klein, who was deputy assistant secretary for economic policy at the Treasury Department at the time and worked closely with him, said the law stopped short of removing bank representatives from boards entirely because of pressure to keep them intact. on the passage of the law.
“The Fed didn’t want that, and neither did the bankers,” Klein said.
From a bank’s perspective, boards of directors give prestige: Regional Fed board members deal with other bank and community leaders and with powerful central bankers.
It may also feature provide actual or perceived information about the economy and monetary policy. Although the discount rate is not important today, managers in some regional banks are given economic briefings while making their decisions.
The regional council vote on discount is often seen as a sort of weather whirl of how a regional bank’s leadership thinks about policy — suggesting that managers might know how their boss will vote when it comes to the federal funds rate, the all-important interest rate. Which the Fed uses to guide the speed of the economy.
This is seen in an era when Wall Street traders hang on every word of Fed officials when it comes to interest rates.
“It’s very embarrassing,” said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis. “There is no gain in having them vote on discount rates.”
Renee Adams, a former New York Federal Reserve scholar who studies corporate boardrooms and is now at the University of Oxford, found that when a bank executive becomes a director, their company’s share price goes up on the news.
“The market thinks they have some advantage,” she said.
Board members spend a great deal of time with the Fed chairmen, who meet regularly with their directors. Mr. Baker would have seen Mary C. Daly, President of the Federal Reserve Bank of San Francisco, at meetings about once a month, her almanacs indicate.
“Supervisory leniency” is a risk.
Directors associated with the bank have no direct role in oversight, and they cannot appoint officers or participate in budgetary decisions related to bank oversight, according to the Fed.
But Mr. Klein is skeptical that Mr. Baker’s position on the board of directors of the San Francisco Fed was not important at all in the case of Silicon Valley.
“Who wants to be the one making trouble about the CEO who’s on your CEO’s board?” He said, explaining that while the organizational structure may have drawn clear lines, they may not have applied cleanly in the “real world.”
Ms. Adams’ research found that banks whose executives sat on their boards actually saw less enforcement action — slaps on the wrist from Fed supervisors — during a director’s tenure.
“There may be supervisory leniency,” she said.
Regime change can be difficult.
This is not the first time that the Federal Reserve’s regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, both Dick Fuld, CEO of Lehman Brothers at the time, and Steve Friedman, who was a director at Goldman Sachs, both served on the board of the Federal Reserve Bank of New York.
Fuld resigned just before Lehman’s collapse in 2008. Friedman left in 2009, after news broke that he had bought Goldman Sachs shares during the crisis, at a time when the Treasury and Federal Reserve were drawing up plans to support the big banks.
Given this controversy, politicians have sometimes focused on the boards of directors of the Federal Reserve. The Democratic Party included language in its 2016 platform to bar CEOs of financial institutions from serving on the boards of Reserve Banks.
Recently, this issue has received bipartisan attention. A bill in development by members of the Senate Banking Committee would limit board memberships to small banks — those with less than $10 billion in assets, according to a person familiar with the material.
The committee is holding a Fed impeachment hearing planned for May 17. Sens. Elizabeth Warren, D-Massachusetts, and Rick Scott, R-Fla., plan to introduce the legislation before then, said a spokesperson for Ms. Warren.
“It is dangerous and unethical for CEOs from the largest banks to serve on Fed boards where these bankers could secure preferential regulatory treatment or exploit privileged information,” Warren said in a statement.
But – as the Dodd-Frank Act made clear – stripping banks of their power at the Fed was a heavy burden.
“As a political target, there is little in Weed,” said Ms. Binder, a political science professor.
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