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GAO: Fed needs to be more transparent about its directors
The affiliation of its directors with financial firms poses "reputational risks" to the Federal Reserve, according to a new study, and the central bank needs to be more transparent about those ties.
The Government Accountability Office (GAO) said the connections of various Fed directors, especially since the financial crisis, need to be highlighted and documented.
"Without more complete documentation of the directors’ roles and responsibilities ... as well as increased public disclosure on governance practices to enhance accountability and transparency, questions about Reserve Bank governance will remain," the GAO stated.
The study came about thanks to an amendment to the Dodd-Frank financial reform law pushed by Sen. Bernie Sanders (I-Vt.), a longtime critic of the Fed who has pushed for more transparency from the central bank.
"Clearly it is unacceptable for so few people to wield so much unchecked power," Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks."
Sanders added that he is consulting with economists to draft a bill that would restructure the Fed and prevent the banking industry from selecting its directors.
Under the current system, each reserve bank's board of directors has three directors that represent commercial banks, and another six meant to represent the public. Fed officials told the GAO that the banks typically look to tap senior executives from various financial firms, as well as nonprofit, private and public companies.
But as the financial system grew and developed, even directors who do not have day jobs in the financial sector have developed ties to the system that could lead some to question their motives.
The relationships have came under particular scrutiny in the wake of the financial crisis, as many of the companies that had close ties to directors relied on Fed assistance to steer through the maelstrom. The GAO study found that 18 current or former directors had ties to firms that received emergency loans from the Fed during the crisis.
For example, Jamie Dimon, who heads JP Morgan Chase & Co., sits on the board of the Federal Reserve Bank of New York, and the Fed provided his firm billions of dollars in loans to help it acquire Bear Stearns.
The role that the directors play in the supervisory and regulatory functions of the Fed has garnered particular scrutiny. While the GAO found that directors had a "limited role" in those aspects of Fed operations, primarily by making budget and personnel decisions, there were areas for improvement. Clearly documenting the role each director plays in a Fed bank's supervision and regulation of financial institutions woul be a step in the right direction.
The study also said that the Fed could do more to increase the diversity of its advisers. In 2010, the ranks of Fed directors were dominated by white men. Of the 108 positions, just 15 were held by minorities, and 15 by women.
Furthermore, the Fed's makeup is dominated by people with financial-services experience, as those with consumer or labor backgrounds were underrepresented.
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