The collapse of Silicon Valley Bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco, which was in charge of overseeing the bank’s safety and soundness, and the bank’s former CEO, Greg Becker, who during years He served on the board of directors of the San Francisco Federal Reserve.
The bank’s collapse on March 10 drew criticism from the Federal Reserve, whose bank supervisors were slow to spot and stop the problems before Silicon Valley Bank experienced a devastating run that required a sweeping government response.
Now Becker could face questions from lawmakers about his role on the board, and whether he created too close a bond between the bank and its regulators, when he testifies before the Senate Banking Committee on the collapse of Silicon Valley Bank on Tuesday.
Mr. Becker’s position on the San Francisco Fed board would have given him little formal power, according to current and former Fed employees and officials. The Federal Reserve’s 12 reserve banks (semi-private institutions spread across the country ) each have a nine-person board of directors, three of whom come from the banking industry. Those boards have nothing to say in banking supervision, and serve primarily as advisors to the leadership of the Fed bank.
But many acknowledged that the setup created the appearance of comfort between the SVB and the Fed. Some outside experts and politicians are beginning to question whether the way the Fed has been organized for more than a century makes sense today.
“They’re like a glorified advisory committee,” said Kaleb Nygaard, a central bank researcher at the University of Pennsylvania. “It causes massive headaches at best, potentially fatal aneurysms at worst.”
The Fed’s boards date back to 1913.
Although regional Fed chairmen and other officials play a limited role in bank supervision, which is largely the purview of Washington, some critics wondered if Fed supervisors in San Francisco failed to effectively police Silicon Valley Bank in part due to the reserve bank’s close ties to the bank. director.
And some asked: Why do banks have representatives on the Fed Board?
The answer is tied to the Fed story.
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 got engaged. They created a public Federal Reserve Board in Washington, along with quasi-private reserve banks across the country.
These reserve banks, which came to be 12 in total, would be constituted as private companies with banks as its shareholders. And like other private companies, they would be overseen by boards, which included bank representatives. Each of the Fed’s reserve banks has nine board members, or directors. Three of them they come from banks, while the rest come from other financial firms, businesses, and labor and community groups.
“The setup is that way because of the way the Federal Reserve was set up in 1913,” said William Dudley, former president of the Federal Reserve Bank of New York, who said the directors served primarily as an advisor of sorts. focus group on banking issues and operational issues, such as cybersecurity.
Boards can grant benefits to members.
Several former Fed officials said bank-related board members played a valuable role in providing real-time information on the financial industry. And 10 current and former Fed staff interviewed for this article agreed on one point: These boards have relatively little official power in the modern era.
As they vote for changes to an interest rate that was once important at the Federal Reserve, called discount rate — that role has become much less critical over time. Board members select Fed chairmen, though since the 2010 Dodd Frank Act, bank-linked directors have not been allowed to participate in those votes.
But the law didn’t go so far as to remove bank representatives from the boards because of a lobbying effort to keep them intact, said Aaron Klein, who was deputy assistant secretary for economic policy at the Treasury Department at the time and worked closely with on the approval of the law.
“The Federal Reserve didn’t want that, and neither did the bankers,” Klein said.
From a bank’s perspective, leadership positions offer prestige: Fed regional board members rub shoulders with other banking and community leaders and powerful central bankers.
They can also offer a real or perceived information advantage about the economy and monetary policy. Although the discount rate is not so important today, the directors of some regional banks receive economic information while making their decisions.
Regional board discount votes have often been seen as something of a weather vane on how a regional bank’s leadership is thinking about policy, suggesting that directors may know how their chairman will vote when it comes to rate federal funds rate, the important interest rate that the Fed uses to guide the speed of the economy.
That’s remarkable in an era when Wall Street traders are hanging on Fed officials’ every word when it comes to interest rates.
“It’s very uncomfortable,” said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis. “There is no gain in them voting on discount rates.”
Renée Adams, a former New York Fed researcher studying corporate boards now at Oxford University, has found that when a bank executive becomes a director, his company’s stock price rises with the news.
“The market thinks they have some advantage,” he said.
And board members get substantial face-to-face time with Fed chairmen, who meet regularly with their directors. Mr. Becker reportedly saw Mary C. Daly, president of the Federal Reserve Bank of San Francisco, in meetings held approximately once a month, his calendars suggest.
‘Supervisory leniency’ is a risk.
Directors linked to the bank do not have a direct role in supervision, nor can they appoint officers or participate in budgetary decisions related to bank supervision. according to the Federal Reserve.
But Klein is skeptical that Becker’s position on the San Francisco Federal Reserve board wouldn’t matter at all in the Silicon Valley Bank case.
“Who wants to be the person who raises issues about the CEO who is on their own CEO’s board of directors?” he said, explaining that while the organizational structure might have drawn clear lines, they may not have been applied cleanly in the “real world.”
Ms Adams’ research found that banks whose executives served on boards actually saw fewer enforcement actions (slap on the wrist from Fed supervisors) during the director’s tenure.
“There can be leniency in supervision,” he said.
Changing the system can be difficult.
This is not the first time that regional Fed boards have raised ethical questions. In the years leading up to the 2008 financial crisis, Dick Fuld, the CEO of Lehman Brothers at the time, and Steve Friedman, who was a director of Goldman Sachs, served on the board of the New York Federal Reserve Bank.
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 boost the big banks.
Given that controversy, politicians have at times focused on Fed boards. The Democratic Party included language in its 2016 platform to bar executives of financial institutions from serving on reserve bank boards.
And the issue has recently gained bipartisan interest. The bill being developed by members of the Senate Banking Committee would limit directorships to small banks, those with less than $10 billion in assets, according to a person familiar with the material.
The committee has a Fed accountability hearing planned for May 17. Sens. Elizabeth Warren, a Massachusetts Democrat, and Rick Scott, a Florida Republican, plan to introduce the legislation before then, a spokesman for Warren said.
“It is dangerous and unethical for executives of the largest banks to serve on Fed boards where these bankers could obtain preferential regulatory treatment or exploit inside information,” Warren said in a statement.
But, as the Dodd Frank legislation illustrated, stripping banks of their power at the Federal Reserve has been a drudgery.
“As a political objective,” said Binder, the political scientist, “it’s a bit in the weeds.”