U.S. House and Senate lawmakers agreed to require greater disclosure on actions by the Federal Reserve and to drop plans to make the New York Fed president a political appointee.
Negotiators on an overhaul of financial legislation amended the bill to reduce the role of commercial banks in naming Fed presidents in Washington yesterday. Under another change, the central bank, after a two-year delay, would have to identify firms that borrow through its discount window or participate in the Fed’s purchases or sales of assets such as mortgage-backed securities.
The revised legislation “represents a modest encroachment on the Fed’s independence, relative to what people might have been thinking,” said Vincent Reinhart, a former Fed monetary-affairs director who is now a resident scholar at the American Enterprise Institute in Washington. “That still doesn’t mean it’s not at risk” from political pressure.
The Fed, which persuaded lawmakers not to reduce its political autonomy and bank supervision powers, will still have to expose its inner workings to public view more than ever before in its 96-year history. Lawmakers faulted the central bank for lax supervision before the financial crisis and demanded transparency on its more than $2 trillion in loans.
The amendments were approved yesterday by House and Senate conferees. The broader legislation requires approval by the full House and Senate before going to President Barack Obama to be signed into law.
Senators in the joint conference debated making the New York Fed chief a White House appointee subject to Senate approval before voting 10-2 to drop the plan. Senator Jack Reed, a Democrat from Rhode Island, argued for changing the appointment process because the New York Fed president is closely involved in supervising the biggest financial firms and has a permanent vote on interest-rate decisions.
“I’ve heard the last few days here major complaints about the Federal Reserve in its run-up to the crisis,” Reed said. “And yet at the end of this conclusion we are not making any, I think, fundamental changes in the operation of the Fed.”
Senate Banking Committee Chairman Christopher Dodd, who had previously pushed for the New York Fed change, said he changed his mind in part because the confirmation process may result in delays in filling the post. Dodd said lobbying from the chairman of the New York Fed’s board of directors helped persuade him.
The legislation doesn’t mean that changes to how regional Fed presidents are appointed are off the table. The Government Accountability Office would be required to complete an audit, within a year, of the system of directors of regional Fed banks, including examining “actual or potential conflicts of interest.”
Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, has said for several years he plans to explore how the regional Fed presidents are selected, repeating his concern this week that the officials tend to favor higher interest rates. “That’s a subject for next year,” Frank said June 15.
The 12 regional Fed presidents are each selected by a nine- member board of directors and approved by the Fed’s Board of Governors in Washington. Currently, three directors are bankers appointed by banks, three are non-bankers selected by banks, and three are non-bankers chosen by the Board of Governors.
Under the changes, only the six non-bankers would select each regional Fed president, subject to governors’ approval. The plan would also replace a Senate provision that prevents bank employees from serving as Fed directors.
The measure on Fed transparency applies to future actions and builds on the Senate bill, which would open the central bank to a one-time audit of its emergency loans and other measures to combat the financial crisis starting in December 2007.
“It looks like you’re going to have pretty good disclosure,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who had backed tougher Fed oversight.
Yet without the governance changes, the Fed is “still going to be an institution that’s dominated by the banks, and that’s really unfortunate and it’s hard to justify,” Baker said. “Why on earth would you have a regulator that’s dominated by the industry it’s regulating?”
Bernanke, while advocating increased transparency for Fed policies and decisions, has held firm against identifying banks that borrow from the Fed’s discount window.
Bloomberg LP has sued the central bank to release records of discount-window loans following a request under the Freedom of Information Act. The U.S. Court of Appeals in New York ruled March 19 that the Fed must release the records. The Federal Reserve Board asked the appeals court in May to reconsider its ruling.
Frank said this week the changes to the legislation would not interfere with pending litigation, including the Bloomberg lawsuit.