San Francisco Fed Ties to S.V.B. Chief Attracts Scrutiny to Century-Old Setup

San Francisco Fed Ties to S.V.B. Chief Attracts Scrutiny to Century-Old Setup

The collapse of the Silicon Valley bank drew attention to the relationship between the Federal Reserve Bank of San Francisco, which was responsible for overseeing the lender’s safety and soundness, and the bank’s former chief executive Greg Becker, who served for years was The Board of Directors of the San Francisco Fed.

The bank’s collapse on March 10 drew criticism from the Fed, whose banking regulators were slow to recognize and address problems before Silicon Valley Bank experienced a devastating run that required a full-scale government response.

Now, Mr. Becker could address lawmakers’ question about his board role — and whether that created too close a connection between the bank and its regulators — when he testifies Tuesday before the Senate Banking Committee on the Silicon Valley bank collapse.

In a prepared statement released ahead of the hearing, Mr. Becker said he was “really sorry” for the bank’s failure. “I don’t think any bank could survive a bank run of this speed and magnitude,” he said.

According to current and former Fed employees and officials, Mr. Becker’s position on the San Francisco Fed’s board would have given him little formal power. The Fed’s 12 reserve banks — semi-private institutions across the country — each have a board of nine, three of whom come from the banking industry. These bodies have no say in banking supervision and act primarily as advisors to the Fed Bank’s leadership.

However, many acknowledged that the setup gave the appearance of comfort between the SVB and the Fed. Some outside pundits and policymakers 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 committee,” said Kaleb Nygaard, a central bank researcher at the University of Pennsylvania. “It causes massive headaches at the best of times, potentially fatal aneurysms at the worst.”

In the days after the Silicon Valley bank collapse, headlines abounded about Becker’s close ties to his bank’s regulator, with many raising questions about a possible conflict of interest.

Although regional Fed presidents and other officials play only a limited role in banking supervision — which largely falls under Washington’s purview — some critics have questioned whether the San Francisco Fed’s supervisors have not been able to effectively oversee the Silicon Valley bank, in part because of the narrow ones Connections of the Reserve Bank to the Bank Manager.

And some asked: why do banks even have representatives on the Fed board?

The answer has to do with the history of the Fed.

When Congress and the White House created the Fed in 1913, they were skeptical about giving government or the private sector unilateral power over the country’s money supply. So they made a compromise. They created a public Fed board in Washington and quasi-private reserve banks across the country.

These twelve reserve banks would be set up like private companies with banks as shareholders. And like other private companies, they would be overseen by boards that included bank representatives. Each of the Fed’s central banks has nine board members, or directors. Three of them come from banks, while the others come from other financial firms, corporations, and worker and community groups.

“The structure is the way it is because the Fed was formed in 1913,” said William Dudley, former president of the Federal Reserve Bank of New York, who said the directors acted primarily as a sort of advisory focus group on banking and operational issues Issues like cyber security.

Several former Fed officials said the board members close to the bank performed a valuable function, providing real-time insight into the financial industry. And ten current and former Fed employees interviewed for this article agreed on one thing: these bodies have relatively little official power in modern times.

While they vote for changes to what used to be an important Fed interest rate — the discount rate — that role has become much less important over time. Board members elect Fed presidents, although since the Dodd-Frank Act of 2010, bank-bound directors are no longer allowed to participate in these votes.

But the law didn’t go as far as barring bank officials from boards altogether because lobbying had tried to keep them intact, said Aaron Klein, who was then assistant secretary of state for economic policy at the Treasury Department and worked closely with him on the bill’s passage.

“The Fed didn’t want that, and neither did the bankers,” Klein said.

From a bank’s perspective, directorships offer prestige: regional Fed board members work alongside other bank and community leaders, as well as powerful central bankers.

They could also provide an actual or perceived informational benefit about the economy and monetary policy. Although the discount rate is not that important nowadays, the directors of some regional banks receive economic information in their decision making.

Discount votes on regional boards have often been seen as a kind of weathervane for how a regional bank’s leadership thinks about policy – suggesting that directors may know how their president will vote when it comes to the federal funds rate, the important interest rate that the Fed controls the speed of the economy.

That’s remarkable at a time when Wall Street traders are listening to every word Fed officials say about interest rates.

“This is a very uncomfortable thing,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. “There’s no benefit in letting them vote on discount rates.”

Renée Adams, a former New York Fed researcher who studies corporate boards and is now at Oxford University, has found that when a bank executive becomes a director, her company’s share price rises on the news.

“The market thinks they have a certain advantage,” she said.

And board members have plenty of time with the Fed chairmen, who meet regularly with their directors. Mr. Becker would have seen Mary C. Daly, President of the Federal Reserve Bank of San Francisco, at meetings that were held about once a month, according to their calendars.

According to the Fed, bank-bound directors have no direct role in oversight, nor can they appoint officials or participate in budget decisions related to banking oversight.

However, Mr. Klein is skeptical that Mr. Becker’s position on the board of directors of the San Francisco Fed played no role whatsoever in Silicon Valley Bank’s case.

“Who wants to be the person who makes trouble with the CEO who sits on their own CEO’s board?” he said, explaining that while the organizational structure has clear lines, they may not have been properly implemented in the “real world”. be.

Ms Adams’ research found that banks whose executives sat on their boards actually experienced fewer enforcement actions — slaps in the face from Fed overseers — during the director’s tenure.

“There could be regulatory leniency,” she said.

This isn’t the first time the Fed’s regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, then chairman of Lehman Brothers, and Steve Friedman, a director at Goldman Sachs, both sat on the board of directors of the New York Fed.

Mr. Fuld resigned shortly before Lehman’s collapse in 2008. Mr. Friedman left the company in 2009 after it was revealed he had bought shares in Goldman Sachs during the crisis, at a time when the Treasury Department and the Fed were preparing plans to strengthen the big banks.

Faced with this controversy, politicians have at times focused on the Fed’s board. The Democratic Party included language in its 2016 program that bans executives of financial institutions from serving on the boards of reserve banks.

And the issue has attracted bipartisan interest lately. A bill currently being drafted by members of the Senate Banking Committee would limit senior positions 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 of Massachusetts, and Rick Scott, a Republican of Florida, plan to introduce the legislation before then, a spokesman for Ms. Warren said.

“It is dangerous and unethical for executives from the largest banks to sit on Fed boards where those bankers could secure preferential treatment from regulators or exploit confidential information,” Ms Warren said in a statement.

But, as the Dodd-Frank Act demonstrated, stripping the banks of their power at the Fed was a difficult task.

“As a political goal,” says political scientist Ms. Binder, “it’s a little unclear.”