In the wake of the multibillion dollar losses at JP Morgan there have been increasing calls for Jamie Dimon to resign from the board of directors of the New York Federal Reserve (see this petition, for example). We agree that he should resign.
But we also think that he shouldn’t have been there in the first place. His presence on the board is evidence of a broader problem with conflicts of interest in the governance of the Federal Reserve, particularly the regional banks. The regional banks are important public regulatory institutions and they should not be managed by the financial institutions they are charged with regulating.
The Board of Governors of the Federal Reserve is chosen by the President and subject to Senate confirmation. But two-thirds of the directors in each of the 12 regional banks that make up the Federal Reserve system are elected by the local banks in that region. These directors may hold stock in or invest in regulated banks. Up to one-third of the board of directors for each regional bank (so-called ‘Class A Directors’) may also be current employees of the regulated banks in that region. And typically they are.
The financial crisis and its aftermath have made clearer than ever before the central role the Federal Reserve plays in our financial system. During the crisis of 2008 and 2009 the Federal Reserve granted trillions of dollars of direct lending assistance to individual banks through special credit programs. The Fed’s role in setting interest rates through the Open Market Committee is enormously important in good times and bad – and regional directors elect the regional bank presidents on that committee. But the Fed’s role in the everyday supervision and oversight of banks and bank holding companies also influences the allocation of trillions of dollars in our economy. Much of this supervision is actually performed by the regional banks, which means the boards for these regional banks are in a position to impact it. This issue is particularly acute at the New York Federal Reserve, which supervises the largest Wall Street banks. We now know, for example, that lenient supervision at the New York Federal Reserve played a crucial role in the massive risk management failures at Citibank that helped lead directly to the crisis.
In the fight over the Dodd Frank act AFR advocated changes to increase the Federal Reserve Board’s accountability to the public, and remove the undue influence of Wall Street banks. But in the end the Dodd-Frank Act made only very limited changes in this area. The law mandated that Class A directors could not participate in the selection of the bank president. In addition, the Federal Reserve Bank of New York has changed its bylaws to limit the role of Class A directors in oversight of bank supervision. More dramatic change is needed.
New legislation introduced by Senators Sanders, Boxer, and Begich — the Federal Reserve Independence Act — would make that change. Their proposal would not only require the removal of Jamie Dimon from the New York Fed, but would fix the structural problem that put him there in the first place. The bill mandates that the directors of regional Federal Reserve banks be appointed by the democratically selected Board of Governors, rather than elected by the banks they supervise. It also bans directors or employees of the Federal Reserve from holding stock in the banks they supervise. These are straightforward, common-sense solutions to the conflict of interest problem that should become law.