The collapse of Silicon Valley Bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco, which oversaw the lender’s safety and soundness, and the bank’s former chief executive, Greg Becker, who spent years at the bank. fed up. The Board of Directors of the San Francisco Fed.
The bank’s March 10 collapse has sparked criticism of the Fed, whose banking regulators were slow to spot and stop problems before Silicon Valley Bank suffered a devastating run that necessitated a sweeping government response.
Now can Mr. Becker will face questions from lawmakers about his governance role — and whether it created too close a relationship between the bank and its regulators — when he testifies before the Senate Banking Committee on the collapse of Silicon Valley Bank on Tuesday.
The position of Mr. Becker on the San Francisco Fed board would have given him little formal power, according to current and former Fed employees and officials. The Fed’s 12 reserve banks — semi-private institutions scattered around the country — each have a nine-member board of directors, three of whom come from the banking industry. These boards have no say in banking supervision and mainly serve as advisers to the Fed Bank’s leadership.
But many acknowledged that the lineup created the appearance of conviviality between SVB and the Fed. Some outside pundits 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 board,” said Kaleb Nygaard, who studies central banking at the University of Pennsylvania. “It causes massive headaches at the best of times, potentially fatal aneurysms at the worst.”
The Fed boards date back to 1913.
In the days following the collapse of Silicon Valley Bank, there were many headlines about Mr. Becker with his bank’s regulator, raising many questions about a potential conflict of interest.
While regional Fed presidents and other officials play a limited role in bank oversight—which is mostly in Washington’s realm—some critics questioned whether San Francisco Fed regulators were failing to keep Silicon Valley in check. effectively control the bank, in part because of the reserve bank’s close ties to the bank. chef.
And some asked: Why do banks even have representatives on the Fed Board?
The answer is tied to the history of the Fed.
When Congress and the White House created the Fed in 1913, they were skeptical about giving unilateral power to the government or private sector over the nation’s money supply. So they compromised. They created a public Fed Board in Washington in addition to quasi-private reserve banks across the country.
Those reserve banks, which would eventually become twelve, would be set up as private companies with banks as their shareholders. And like other private companies, they would be overseen by boards, including representatives from the bank. Each of the Fed reserve banks has nine board members or directors. Three of them are from banks, while the others are from other financial, corporate, and labor and community groups.
“The setup is the way it is because of the way the Fed was founded in 1913,” said William Dudley, the former president of the Federal Reserve Bank of New York, who said the directors served primarily as an advisory body of sorts. focus group on banking issues and operational issues, such as cybersecurity.
The boards can give benefits to members.
Several former Fed officials said the banking-related board members provided a valuable position and provided real-time insight into the financial industry. And 10 current and former Fed employees interviewed for this article agreed on one point: these boards have relatively little official power in the modern age.
As they vote for changes to a formerly important interest rate at the Fed — called the discount rate — that role has become much less critical over time. Board members select Fed presidents, although since the Dodd Frank Act of 2010, bank-bound executives are barred from participating in those ballots.
But the law didn’t go so far as to remove bank representatives from boards of directors altogether because of a lobby to keep them intact, said Aaron Klein, who at the time was deputy assistant secretary for economic policy in the Treasury Department and worked closely on the passage of the law.
“The Fed didn’t want that, and neither did the bankers,” said Mr. Small.
From a bank’s perspective, board positions provide prestige: Board members of the regional Fed work closely with other bank and community leaders as well as powerful central bankers.
They may also provide an actual or perceived information advantage about the economy and monetary policy. Although the discount rate is not that important these days, directors of some regional banks are given economic instructions as they make their decisions.
Discount votes from regional boards are often seen as a kind of weathervane for how a regional bank’s leadership feels about policy — suggesting that directors may know how their president is going to vote when it comes to the federal funds rate, the key interest rate the Fed uses to drive the speed of the economy.
That’s remarkable in an era when Wall Street traders hang on Fed officials’ every word when it comes to interest rates.
“It’s a very uncomfortable thing,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. “There’s no point in letting them vote on discount rates.”
Renée Adams, a former New York Fed researcher who studies corporate boards and is now studying at the University of Oxford, has found that when a bank executive becomes a director, their company’s stock price rises on the news.
“The market believes they have an advantage,” she said.
And board members get a lot of face time with Fed presidents, who regularly meet with their directors. Mr. Becker is said to have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held about once a month, according to her calendars.
‘Supervisory leniency’ is a risk.
Bank-tied executives have no direct role in oversight, according to the Fed, nor can they appoint officials or participate in budgetary decisions related to bank oversight.
But Mr. Klein is skeptical that Mr. Becker’s position on the board of directors of the San Francisco Fed did not matter at all in the case of Silicon Valley Bank.
“Who wants to be the person who raises issues about the CEO sitting on your own CEO’s board?” he said, explaining that while the organizational structure may have drawn clear lines, they may not have been neatly applied in the “real world.”
Ms. Adams’ research found that banks whose executives sat on boards of directors actually received fewer enforcement actions—punches on the wrist from Fed regulators—during the director’s tenure.
“Maybe there is leniency from the regulator,” she said.
Changing the system can be difficult.
This isn’t the first time Fed regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, then CEO of Lehman Brothers, and Steve Friedman, who was a director at Goldman Sachs, both served on the board of the New York Fed.
Mr. Fuld resigned just before Lehman collapsed in 2008. Mr. Friedman left in 2009, after news broke that he had bought shares of Goldman Sachs during the crisis, at a time when the Treasury and the Fed were drawing up plans to support big banks.
Given that controversy, politicians have sometimes targeted the Fed’s boards. The Democratic Party included language in its 2016 platform to bar financial institution executives from serving on reserve bank boards.
And the issue has recently gained bipartisan interest. 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 scheduled a hearing on Fed accountability for May 17. Senators Elizabeth Warren, a Democrat from Massachusetts, and Rick Scott, a Republican from Florida, plan to introduce the legislation to do so, a spokesperson for Ms. Warren said.
“It is dangerous and unethical for executives of the largest banks to serve on Fed boards, where these bankers may receive preferential treatment or abuse privileged information,” Ms Warren said in a statement.
But – as the Dodd Frank legislation illustrated – stripping banks of their power at the Fed was a tough task.
“As a political target,” said Ms. Binder, the political scientist, “it’s kind of in the weeds.”
