George Says Fed Directors Should Meet Standards or Resign

Federal Reserve Bank of Kansas City President Esther George said that directors at the Fed’s regional banks who don’t meet the central bank’s standards for impartiality should step down.

“Bankers should serve,” George said in a statement released today by the Kansas City Fed. “There are high standards that apply to Reserve Bank directors, and when an individual no longer meets these standards, the director resigns voluntarily to allow someone who does meet the criteria to serve.”

The directors at the 12 regional Fed banks are under renewed scrutiny following a $2 billion trading loss at JPMorgan Chase & Co. that revived concern that its regulator, the New York Fed, is too cozy with Wall Street. JPMorgan Chief Executive Officer Jamie Dimon is one of three bankers sitting on the board of the New York Fed.

Elizabeth Warren, a Democrat and U.S. Senate candidate from Massachusetts, has called for Dimon’s resignation, while Treasury Secretary Timothy F. Geithner said last week that having bankers on the board of the New York Fed creates a “perception” problem. Senators Bernie Sanders, Barbara Boxer and Mark Begich on May 22 introduced legislation that would remove banking industry executives from the regional Fed banks’ boards of directors.

“The Federal Reserve Banks -- to a bank -- love having bank directors on their boards,” said William K. Black, a professor of economics and law at the University of Missouri at Kansas City and a former bank regulator. “They’re desperate to retain that system and the leading threat is Jamie Dimon who has become a poster child for the conflict.”

Defense of Role

George defended the role of bankers on the Fed regional bank boards because they “provide critical, in-depth information about economic conditions in their communities.” Also, the bankers “play no part in the Fed’s role in supervising and regulating financial institutions.”

Still, George said directors should step down if they don’t meet the standards of the Fed’s Guide to Conduct for Directors of Federal Reserve Banks. Directors should avoid any action that might “result in or create the appearance” of harming “the confidence of the public in the integrity” of the Fed, the guide says, according to George’s statement.

“No individual is more important than the institution and the public’s trust,” George said. She didn’t refer to any director by name and declined further comment through Bill Medley, a Kansas City Fed spokesman.

‘There’s an Issue’

“If you’re going to put out a statement it’s implicitly stating that there’s an issue here,” said Sarah Binder, a senior fellow at the Brookings Institution in Washington.

“But Jamie Dimon stepping down doesn’t actually solve the problem if there’s a broader problem of having bankers on the board,” said Binder, who researches the relationship between the Fed and Congress.

Dimon said on May 15 in Tampa, Florida, that the New York Fed’s board of directors is “not like a board, it’s more of an advisory group” and “I am not involved at all in the supervisory side of that.”

JPMorgan stock has fallen 17 percent since Dimon announced the $2 billion loss on May 10, compared with a 3 percent loss for the Standard & Poor’s 500 Index.

Bankers serve on Fed boards under terms established by Congress in the 1913 Federal Reserve Act. The regional banks each have nine directors, with three of them bankers. Three others are appointed by banks to represent the public and the remaining three are selected by the Fed’s Board of Governors in Washington.

‘Creature of Congress’

“The Federal Reserve is a creature of Congress and they’re free to shape it any way they want,” Minneapolis Fed President Narayana Kocherlakota said in response to audience questions yesterday in Rapid City, South Dakota.

“As a president, I get a lot of incredibly useful information from the bank directors that serve on our boards and I think it would be a loss to me in my policy role to lose that valuable source of information,” he said.

Congress most recently amended the role of directors with the 2010 Dodd-Frank Act which ended the practice of banker directors having a vote in electing regional presidents, a move the New York Fed’s William C. Dudley said in a September interview that he supported.

Yet some Senators now want to further separate the Fed’s boards of directors from banking industry executives.

“Allowing currently employed banking industry executives to serve as directors on the boards of directors of Federal Reserve banks is a clear conflict of interest that must be eliminated,” according to the text of legislation released by Sanders, a Vermont Independent who caucuses with Democrats. His cosponsors, both Democrats, are Alaska’s Begich and California’s Boxer.