The collapse of the Silicon Valley bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco and the bank’s former chief executive, Greg Becker, who was in charge of overseeing the lender’s safety and soundness. years He sat on the board of directors of the San Francisco Fed.
The bank’s collapse on March 10 sparked criticism of the central bank, saying its bank supervisors were slow to spot and stop problems before the Silicon Valley bank experienced a disastrous run.
Now, Mr. Becker faces questions from lawmakers about his board role — and that created a much closer relationship between the bank and its regulators.
In Prepared testimony Released before trial, Mr. Becker said he was “really sorry” for the bank’s failure. “I don’t believe any bank can survive a bank run of that speed and scale,” he said.
According to current and former Fed staff and officials, Mr. Becker’s position would have given him little formal authority. The central bank’s 12 Reserve Banks – semi-private institutions located across the country – each have a nine-person board of directors, three of whom come from the banking industry. There are those boards Say no In bank supervision, and mainly serve as advisors to the leadership of the Fed.
But many agreed that the arrangement created a cozy atmosphere between the SVB and the Fed. Some outside experts and politicians are beginning to question whether the way the central bank has been organized for more than a century makes sense today.
“They’re like a legendary advisory board,” says Caleb Nygaard, who studies central banks at the University of Pennsylvania. “It causes massive headaches at the best of times, dangerous aneurysms at the worst.”
Fed boards date back to 1913.
In the days following the Silicon Valley banking collapse, Headlines Mr. Becker’s close connections with the banking regulator were among many others raise Questions About potential conflict of interest.
Although regional central bank presidents and other officials have a limited role in bank supervision — which is largely the domain of Washington — some critics have wondered why Silicon Valley has failed to effectively police banking. Chief Executive.
And some asked: Why do banks have representatives on the Federal Board?
The answer is tied to the history of central banks.
When Congress and the White House created the Federal Reserve in 1913, they were skeptical of giving the government or the private sector unilateral authority over the nation’s money supply. So they compromised. They joined with semi-private reserve banks around the country to form a public central bank in Washington.
RBIs, which are 12th in total, will be set up like private companies with banks. as their partners. Like other private companies, they are overseen by boards – which include bank representatives. Each of the central reserve banks has nine board members or directors. Three of them Some came from banks, while others came from other financial institutions, businesses, and labor and community groups.
“The system exists because of the way the Fed was set up in 1913,” said William Dudley, a former president of the Federal Reserve Bank of New York, who said the directors served mainly as a sort of advisory. A group focused on banking issues and operational issues such as cyber security.
Boards may provide benefits to members.
Several former central bank officials, bank-related panel members provided valuable functionality, providing real-time insight into the financial sector. The 10 current and former central bank employees interviewed for this article agreed on one point: these boards have relatively little formal authority in modern times.
When they vote on previously important interest rate changes at the central bank – called Discount price – That role has become much less critical over time. After the 2010 Dodd Frank Act, where board members elect Fed chiefs, bank-affiliated directors are no longer allowed to participate in those votes.
But the law didn’t go far enough to remove bank representatives from the boards because of a lobbying push to keep them, said Aaron Klein, then deputy assistant secretary for economic policy at the Treasury Department. Paragraph of the Act.
“The central bank doesn’t want that, and neither do the bankers,” Mr. Klein said.
From a bank’s perspective, directors confer prestige: regional central bank members rub shoulders with other bank and community leaders and powerful central bankers.
They may provide a real or perceived informational advantage about the economy and monetary policy. Although the discount rate is not important today, in some regional banks directors are given economic explanations when making their decisions.
Regional board waiver votes are seen as a kind of weather forecast for how a regional bank’s leadership is thinking about policy — it’s a way for directors to know how their president is going to vote when it comes to the federal funds rate, a key interest rate. The central bank is used to guide the pace of the economy.
That’s significant in an era when Wall Street traders hang on every word from central bankers when it comes to interest rates.
Narayana Kocherlakoda, former president of the Federal Reserve Bank of Minneapolis, said, “This is a very bad thing. “There is no gain from them voting at discounted rates.”
Renee Adams is a former New York Fed researcher who studied corporate boards and is now at Oxford University. was discovered When a bank executive is a director, their company’s stock price rises on the news.
“The market believes they have some upside,” he said.
And board members get considerable time with Fed leaders, who meet regularly with their directors. Mr. Becker, President of the Federal Reserve Bank of San Francisco, Mary C. Daly was seen at meetings roughly once a month. Calendars suggest.
‘Supervisory softness’ is a danger.
Bank-affiliated directors have no direct role in supervision and cannot appoint officers or participate in budgetary decisions related to bank supervision. According to the central bank.
But in the case of Silicon Valley Bank, the San Francisco Fed panel said Mr. Mr. Klein doubts that Becker’s stance was taken lightly.
“Who wants to be the person raising issues about a CEO who’s on your own CEO’s board?” He explained that while the organizational structure may draw clear lines, they may not apply cleanly in the “real world.”
Ms. According to Adams’ research, banks that sit on executive boards actually saw fewer enforcement actions — a slap on the wrist from Fed supervisors — during the director’s tenure.
“Oversight can be lenient,” he said.
Changing the system can be difficult.
This is not the first time central bank regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, then Lehman Brothers chief executive, and Steve Friedman, a director at Goldman Sachs, both served on the New York Fed board.
Just before Lehman collapsed in 2008, Mr. Fuld resigned. In 2009, Mr. Friedman left at a time when the Treasury and the Fed were devising plans to improve the big banks.
Given that controversy, politicians sometimes focus on central bank boards. Democrats added language to their 2016 platform to bar executives of financial institutions from serving on Reserve Bank boards.
And the issue has recently gained bipartisan interest. Draft legislation being developed by members of the Senate Banking Committee would limit directorships to smaller banks — those with less than $10 billion in assets, according to a person familiar with the matter.
A in the group An inquiry into the central bank’s accountability is planned For May 17. Senators Elizabeth Warren, Democrat of Massachusetts, and Rick Scott, Republican of Florida, plan to introduce the legislation before then, Ms. Warren’s spokesman said.
“It is dangerous and unethical for executives of major banks to serve on Fed boards, as these bankers may receive preferential regulatory treatment or take advantage of privileged information,” Ms. Warren said in a statement.
But — as the Dodd Frank Act illustrates — removing central bank power is a big lift.
“As a political goal,” said political scientist Ms. Binder, “it’s a little bit in the weeds.”