The Federal Reserve Board of Governors that’s taking shape under Janet Yellen has a conspicuous and unusual absence: anyone with a community-banking background.
The lack of a representative is raising anxiety among executives of the almost 7,000 banks in the United States with assets under $10 billion, many of them struggling to understand and influence the Fed’s overhaul of the financial system under the Dodd-Frank Act.
“I’ve been in the banking industry for over 30 years and in my entire tenure there’s always been at least one governor that understood the community-banking industry,” said Camden Fine, the president of the Independent Community Bankers of America. “We’re letting our feelings be known to the White House and Congress. We feel strongly that someone should.”
While community banks’ share of financial-industry assets is just 14 percent, according to a 2012 Federal Deposit Insurance Corp. report, they provide almost half of small loans to farms and businesses and serve different geographic areas than the largest banks. Their role in supplying credit is critical for small businesses, those with fewer than 50 workers, which employ 48 million Americans.
“It’d be nice to have a community banker, someone who’s actually made loans, taken deposits, and can understand what middle America, small-town America is thinking and will bring that voice to the table,” Frank Keating, president and chief executive officer of the American Bankers Association, said in an interview last month on Bloomberg Radio’s “The Hays Advantage.”
Community banks are often the only institutions serving rural areas and smaller towns. According to an FDIC report, more than 1,200 of the 3,238 counties in the U.S., with 16.3 million residents, “would have limited physical access to mainstream banking services without the presence of community banks.”
The central bank’s board has long been composed of a mix of academics, lawyers, financiers and commercial bankers. It is currently in flux as Chairman Ben S. Bernanke is about to be replaced by Yellen, the current vice chairman, who was confirmed by the Senate this week.
Until recently the Fed had two governors who had experience with retail banks. Elizabeth Duke, who retired from the Fed at the end of August, was a career community banker. Sarah Bloom Raskin, who is awaiting confirmation as deputy Treasury secretary, was Maryland’s banking regulator.
President Barack Obama hasn’t announced appointments to replace Duke and Raskin and to succeed Yellen as vice chairman. Amy Brundage, a White House spokeswoman, and David Skidmore, a spokesman for the Fed, declined to comment.
People familiar with the selection process have identified three likely appointments, none of whom has a community-banking background: Lael Brainard, formerly the U.S. Treasury Department’s top international official, is likely to be appointed to fill one vacancy, and current governor Jerome Powell is likely to be renominated for a new term after his current one expires this month. Stanley Fischer, the former governor of the Bank of Israel, is said to be Obama’s top choice to succeed Yellen as the Fed’s No. 2 official.
The job of Fed governor has grown more complex in recent years, as officials experiment with unconventional monetary policy and have taken on new responsibilities for monitoring financial stability. The board is in charge of supervising and regulating the nation’s bank-holding companies and issuing regulations required under the 2010 Dodd-Frank Act.
The board of governors has a subcommittee on community banking, dedicated to examining how regulations affect smaller financial institutions. The subcommittee currently includes Raskin and Powell, who was an investment banker and also worked in private equity.
The push to maintain community-bank representation on the board of governors comes as the industry struggles to cope with regulations like the Volcker Rule, which bans banks from proprietary trading, and Basel III, a set of international capital standards aimed at making banking systems safer.
U.S. financial regulators are trying to determine how they can let some smaller banks keep certain collateralized debt obligations that lenders said they’d have to divest under Volcker Rule trading restrictions, according to two people with knowledge of the discussions. Banking groups have been pressing for the relief.
The federal agencies are considering giving the banks grandfathering protection or other means to hold onto the securities and have yet to decide how to do it, according to the people, who requested anonymity because the talks are private. Industry groups said that without a regulatory fix, CDO losses could total about $600 million.
“The Volcker Rule is not the appropriate vehicle for the regulators to revisit how community banks manage their portfolios,” Democratic Senator Joe Manchin of West Virginia, and Republican Senators Mark Kirk of Illinois and Roger Wicker of Mississippi, wrote in a Dec. 18 letter to regulators.
“The cumulative burden of having to be aware of and figure out if regulations will apply to them, that burden is significant for community banks,” said Tanya Marsh, an associate professor of law at Wake Forest University in Winston-Salem, North Carolina. She warned at a St. Louis Fed conference in October that the regulations may be giving the larger banks a “further competitive advantage.”
“I know a lot of the agencies have created an advisory board of community bankers, but the main policy makers by and large do not have direct experience,” said Marsh. Their speeches and actions often “reflect a focus on the largest 15 banks,” she said. “You identify with what you know, you identify with what your experience is.”
Among candidates being pushed by the industry are John Ducrest, the commissioner of the Louisiana Office of Financial Institutions and a non-voting member of the Financial Stability Oversight Council, and Thomas Hoenig, the former Kansas City Fed President whom Obama nominated to be vice chairman of the Federal Deposit Insurance Corp. Hoenig declined to comment and Ducrest didn’t respond to a request for comment.
The Federal Reserve Act calls for the governors to come from diverse backgrounds, saying the appointments should have “due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”
Prior to Duke’s appointment, the Fed’s board had two governors with banking backgrounds. Mark Olson, who served from 2001 to 2006, was president and CEO of Security State Bank in Fergus Falls, Minnesota. Susan Bies, a governor from 2001 to 2007, was a former executive at First Tennessee National Corp. From 1987 to 2001, Edward Kelley, who helped found three banks in Houston, served on the Fed’s board.
Through the 1960s, governors often had a wide range of backgrounds, according to a study from the Conference of State Bank Supervisors, released in October, documenting the composition of the Fed’s board. More recently, the Board of Governors has been increasingly stacked with academics, while representatives of finance, agriculture, commerce and industry have become less common, they found.
“We’re looking at each name that gets floated and we have the same concern,” said Margaret Liu, senior vice president and deputy general counsel for CSBS, said. “We’ve shared our study with folks on the Hill too.”
Bank supervision experience “is very important to us,” and that need can be met by appointing someone who has worked as a bank regulator, or “somebody like Elizabeth Duke,” who dealt with the regulations as a community-banking executive, Liu said.
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