Two opposing U.S. senators have joined forces in a bipartisan effort to keep the presence of big banks away from Federal Reserve boards of directors.
Sens. Elizabeth Warren (D-MA) and Rick Scott (R-FL) have proposed a bipartisan bill to keep big bankers off the boards of regional Federal Reserve banks.
The legislation seeks to eliminate conflicts of interest and bolster central bank accountability.
“I’ve got an idea–a bipartisan idea–that I’m introducing with Senator Rick Scott today: get the big bankers off the Reserve Banks boards of directors,” Warren said during a Wednesday hearing of the Senate Banking, Housing, and Urban Affairs Committee.
According to a report from Bloomberg, the bill seeks to limit which banks can serve as Class A directors of the Federal Reserve’s 12 regional banks.
The report cites a summary of the bill that has not yet been made public.
Specifically, the measure calls for restricting eligibility to banks with less than $50 billion in assets.
It also seeks to block banks that have an “above-average” number of outstanding supervisory warnings, per the report.
“Congress needs to act to eliminate conflicts of interest and strengthen accountability at the Fed,” Warren said in a statement laying out the rationale for the measure.
The proposal comes as the fallout from the collapse of Silicon Valley Bank (SVB) continues to reverberate through the banking sector.
SVB’s former chief executive officer Greg Becker was a Class A director on the board of the San Francisco Federal Reserve, which sparked concerns about conflict of interest.
Becker left his position on the board of the San Francisco Fed on March 10, the day SVB was ordered shut by regulators and subjected to an orderly wind-down known as resolution.
Seeking to address potential conflicts of interest and bolster transparency, Warren’s and Scott’s proposal would also open up the process of appointing directors and presidents of the Fed regional banks to public comment and hearings.
It would also establish 10-year term limits for appointees while requiring the Washington-based Federal Reserve Board of Governors to launch a review of top regional Fed officials if a bank fails in their district.
Becker testified before the Senate Banking Committee on Monday, apologizing for the “devastating” collapse of SVB, which he blamed on the high-interest rate environment and a torrent of deposit withdrawals.
In prepared testimony, Becker said that SVB was responsive to regulator concerns about its risk management practices but was caught off guard by an “unprecedented” bank run.
Becker’s remarks contrast with the findings of a Fed report that blamed the collapse on a failure on the part of SVB’s senior management to “manage basic interest rate and liquidity risk.”
The report also faulted SVB’s board for having “failed to oversee senior leadership and hold them accountable,” while also saying that Fed supervisors “failed to take forceful enough action” with regard to the shortcomings in which SVB was managed.
At the time of its collapse, SVB had “31 unaddressed safe and soundness supervisory warnings,” the report said, which is triple the average number of its industry peers.
Fed regulators initially failed to “fully appreciate the extent of the vulnerabilities” of SVB as it grew in size and as the central bank hiked rates to quash soaring inflation, putting pressure on some of the bank’s asset valuations.
SVB relied on funding from extremely large deposits from the tech sector, most of which were uninsured, meaning above the $250,000 deposit insurance cap offered by the Federal Deposit Insurance Corporation (FDIC).
More than 95 percent of the deposits at the California-based bank were uninsured.
The rapid unwind of SVB occurred when uninsured depositors began to pull out their money en masse after the bank reported a $1.8 billion loss on bond sales that had dropped in value owing to the Fed’s rate boosts.
A day before SVB’s collapse, its customers withdrew $42 billion in a single day, leaving it with a negative cash balance of about $1 billion.
The fallout from SVB’s failure drove increased deposit outflows from smaller regional banks, with deposits at such institutions falling by a record amount during the week following SVB’s collapse.
In a bid to stem financial contagion and prevent other bank runs, federal regulators invoked emergency powers to backstop all deposits at SVB, even those above the FDIC’s coverage cap.
The 12 regional Federal Reserve banks are semi-private institutions overseen by the Fed in Washington.
Their respective boards watch over the banks directly and provide advice on governance as well as insights and intelligence on how local economies are performing.
A key economic intelligence product released regularly by the regional Fed banks is the so-called “Beige Book,” a compendium of surveys and interviews carried out across all 12 districts.
The latest Beige Book, released at the end of April, showed that economic stresses have increased, consumer spending has softened, inflationary pressures remain elevated, and bank lending has pulled back.
Each of the 12 regional Federal Reserve banks is overseen by a board that consists of private citizens.
Besides having three directors to represent banks, there are six other directors who present a mix of local businesses and community interests.
Three of those directors are selected by the Fed’s Board of Governors in Washington, while the rest are selected in a local process.
The Fed boards also lead the process to select new presidents when there are vacancies, although directors from firms regulated by the Fed are not allowed to take part in that process.
The directors of the Fed banks have been in the spotlight in recent years as the central bank has faced criticism that bank directors were too weighted towards the business and banking community.
The boards have also created issues for the Fed in the past.
For instance, the New York Fed’s board was heavily dominated by bankers at the onset of the financial crisis that gripped the nation 15 or so years ago.
The New York Fed’s board even included the leader of Lehman Brothers, a company whose spectacular collapse in the fall of 2008 has been widely portrayed as triggering the most acute phase of the financial crisis.
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