The collapse of Silicon Valley Bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco, which was in charge of overseeing safety and soundness at the lender, and the bank’s former chief executive, Greg Becker, who for years sat on the San Francisco Fed’s board of directors.
The bank’s collapse on March 10 has prompted criticism of the Fed, whose bank supervisors were slow to spot and stop problems before Silicon Valley Bank experienced a devastating run that necessitated a sweeping government response.
Now, Mr. Becker could face lawmaker questions about his board role — and whether it created too close a link between the bank and its regulators — when he testifies on Tuesday before the Senate Banking Committee about Silicon Valley Bank’s collapse.
In prepared testimony published before the hearing, Mr. Becker said he was “truly sorry” for the bank’s failure. “I do not believe that any bank could survive a bank run of that velocity and magnitude,” he said.
Mr. Becker’s position on the San Francisco Fed board would have given him little formal power, according to current and former Fed employees and officials. The Fed’s 12 reserve banks — semiprivate institutions dotted across the country — each has a nine-person board of directors, three of whom come from the banking industry. Those boards have no say in bank supervision, and serve mainly as advisers for the Fed bank’s leadership.
But many acknowledged that the setup created the appearance of coziness between S.V.B. and the Fed. Some outside experts and politicians 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, who researches central banks at the University of Pennsylvania. “It causes massive headaches in the best of times, potentially fatal aneurysms in the worst of times.”
The Fed boards date back to 1913.
In the days after Silicon Valley Bank’s collapse, headlines about Mr. Becker’s close ties to his bank’s regulator abounded, with many raising questions about a possible conflict of interest.
Though regional Fed presidents and other officials play a limited role in bank oversight — which is mostly in Washington’s domain — some critics wondered if supervisors at the San Francisco Fed failed to effectively police Silicon Valley Bank partly because of the reserve bank’s close ties to the bank’s chief executive.
And some asked: Why do banks have representatives on the Fed Board at all?
The answer is tied to the Fed’s history.
When Congress and the White House created the Fed in 1913, they were skeptical about giving either the government or the private sector unilateral power over the nation’s money supply. So they compromised. They created a public Fed Board in Washington, alongside quasi-private reserve banks around the country.
Those reserve banks, which ended up numbering 12 in total, would be set up like private companies with banks as their shareholders. And much like other private companies, they would be overseen by boards — ones that included bank representatives. Each of the Fed reserve banks has nine board members, or directors. Three of them come from banks, while the others come from other financial companies, businesses, and labor and community groups.
“The setup is the way that it is because of the way the Fed was set up in 1913,” said William Dudley, the former president of the Federal Reserve Bank of New York, who said that the directors served mainly as a sort of advisory focus group on banking issues and operational issues, like cybersecurity.
The boards may give members benefits.
Several former Fed officials said that the bank-related board members provided a valuable function, offering real-time insight into the finance industry. And 10 current and former Fed employees interviewed for this article agreed on one point: These boards have relatively little official power in the modern era.
While they vote for changes on a formerly important interest rate at the Fed — called the discount rate — that role has become much less critical over time. Board members select Fed presidents, though since the 2010 Dodd Frank law, the bank-tied directors have not been allowed to participate in those votes.
But the law didn’t go so far as to cut bank representatives from the boards altogether because of a lobbying push to keep them intact, said Aaron Klein, who was deputy assistant secretary for economic policy at the Treasury Department at the time and worked closely on the law’s passage.
“The Fed didn’t want that, and neither did the bankers,” Mr. Klein said.
From a bank’s perspective, directorships offer prestige: Regional Fed board members rub shoulders with other bank and community leaders and with powerful central bankers.
They might also offer either an actual or a perceived information advantage about the economy and about monetary policy. Although the discount rate is not as important today, directors at some regional banks are given economic briefings as they make their decisions.
Regional board discount votes have often been seen as a sort of weather vane for how a regional bank’s leadership is thinking about policy — suggesting that directors might know how their president is going to vote when it comes to the federal funds rate, the important interest rate that the Fed uses to guide the speed of the economy.
That is notable in an era in which Wall Street traders hang on Fed officials’ every word when it comes to interest rates.
“It’s a very awkward thing,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. “There’s no gain to having them vote on discount rates.”
Renée Adams, a former New York Fed researcher who studies corporate boards and is now at the University of Oxford, has found that when a bank executive becomes a director, the stock price of their firm rises on the news.
“The market believes that they have some advantage,” she said.
And Board members do get substantial face time with Fed presidents, who meet regularly with their directors. Mr. Becker would have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held roughly once a month, her calendars suggest.
‘Supervisory leniency’ is a risk.
Bank-tied directors have no direct role in supervision, nor can they appoint officials or participate in budget decisions related to bank oversight, according to the Fed.
But Mr. Klein is skeptical that Mr. Becker’s position on the San Francisco Fed’s board did not matter at all in the case of Silicon Valley Bank.
“Who wants to be the person raising problems about the C.E.O. who is on the board of your own C.E.O.?” he said, explaining that even though the organizational structure might have drawn clear lines, those may not have cleanly applied in the “real world.”
Ms. Adams’s research found that banks whose executives sat on boards did in fact see fewer enforcement actions — slaps on the wrist from Fed supervisors — during the director’s tenure.
“There may be supervisory leniency,” she said.
Changing the system might prove difficult.
This is not the first time the Fed regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, the Lehman Brothers chief executive at the time, and Steve Friedman, who was a director at Goldman Sachs, both served on the New York Fed board.
Mr. Fuld resigned just before Lehman collapsed in 2008. Mr. Friedman left in 2009, after news broke that he had bought Goldman Sachs stock during the crisis, at a time when the Treasury and the Fed were drawing up plans to bolster big banks.
Given that controversy, politicians have at times focused on the Fed boards. The Democratic Party included language in its 2016 platform to bar executives of financial institutions from serving on reserve bank boards.
And the issue has recently garnered bipartisan interest. Draft legislation under development by members of the Senate Banking Committee would limit directorships to small banks — those with less than $10 billion in assets, according to a person familiar with the material.
The committee has a hearing on Fed accountability planned for May 17. Senators Elizabeth Warren, Democrat from Massachusetts, and Rick Scott, Republican from Florida, plan to introduce the legislation ahead of that, a spokesperson for Ms. Warren said.
“It’s dangerous and unethical for executives from the largest banks to serve on Fed boards where these bankers could secure preferential regulatory treatment or exploit privileged information,” Ms. Warren said in a statement.
But — as the Dodd Frank legislation illustrated — stripping banks of their power at the Fed has been a heavy lift.
“As a political target,” said Ms. Binder, the political scientist, “it’s a little in the weeds.”
Source: New York Times
