Two senators want bank executives banned from Fed boards

U.S. Sens. Barbara Boxer, D-Calif., and Bernie Sanders, I-Vt., proposed a bill Tuesday that would block employees of banks regulated by the Federal Reserve from serving on any of the Fed’s 12 district banks’ board of directors.

If passed, the proposed legislation would block banking executives from obtaining director posts at the 12 Federal Reserve regional banks, according to a press release from Sanders’ office. 

Banking expert Christopher Whalen, senior managing director with Tangent Capital Partners, sees the issue as much more nuanced than the bill might suggest.

Whalen says bankers have always been tied to the Fed and its board, but too-big-to-fail issues and the recent merging of the sovereign and private banking interests has made it a good idea not to place bank heads on the Fed board.

“Originally, the bankers wanted to control the Fed,” Whalen said. “The board of the bank does only one thing which is to pick the president, ” Whalen explained. “They don’t have any involvement in bank supervision.”

With this in mind, having JPMorgan Chase (JPM) CEO Jamie Dimon on the New York Federal Reserve Bank‘s board is not unusual, according to Whalen. But he says now that the perception of conflict of interest is stronger, it’s more likely that change is needed.

The senators proposing to change big bank appointments cite a 2011 Government Accountability Office report in their proposed bill, which asserts the Fed board of directors gives the “appearance of a conflict of interest” and poses “reputational risks” to the Federal Reserve.

The issue was further inflamed when Dimon ended up facing steep trading losses initially estimated at $2 billion, but which have since grown even larger, sparking concerns about Fed independence from big banks that rely on the Federal Reserve for bailouts and interest-rate setting.

“It is a blatant conflict of interest for Jamie Dimon, the CEO and chairman of JPMorgan Chase, to serve on the New York Fed’s board of directors,” Sanders said. “If this is not a clear example of the fox guarding the henhouse, I don’t know what is.”

Whalen said that historically, in the 1920 and 1930s when banks were truly private, having bank leaders on the board wasn’t an issue. But today, creates more of a perception problem.

The proposed bill also would not allow anyone who works for or invests in a firm eligible to receive direct financial assistance from the Fed to sit on the board of directors or serve as a Fed employee.

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