William J. McDonough lives and breathes monetary policy, as any dedicated central banker must. But he also has a deep interest in regulation, and he is making the world take notice.
Speaking last week on the need to modernize supervision of the industry, the president of the Federal Reserve Bank of New York said regulators should safeguard the stability of financial markets rather than just protecting individual institutions and deposit insurance funds from failure.
Industry officials said Mr. McDonough has the experience, demeanor, and respect needed to lobby for changes in the global regulatory framework.
"He is a real banker with broad banking experience," said Walter V. Shipley, chairman and chief executive of Chase Manhattan Corp., who has known Mr. McDonough for 20 years. "He is very cool under pressure. He keeps a broad perspective and doesn't lose sight of the big picture."
"I'm a fan," said George W. Hamlin 4th, president and chief executive of the Canandaigua National Bank and Trust Co. and a director of the New York Fed. "He is a man of real substance, and he has a world perspective."
In unveiling his campaign last week in a speech to the Institute of International Bankers, Mr. McDonough said change is necessary because of growing worldwide competition, deregulation of capital markets in developing countries, the emergence of complex derivatives, and the convergence of the banking, insurance, and securities industries.
He called for modernizing risk-based capital rules to include legal, operational, computer, and portfolio concentration risks. He also said he wants to develop risk-based supervision further, saying institutions with strong internal controls should be subject to less intrusive oversight than those without such systems.
He also is urging the accounting industry to adopt global standards for financial reporting, saying this would make it easier to judge the creditworthiness of foreign institutions. And Mr. McDonough is demanding that bank managements review their corporate pay systems to ensure they do not encourage employees to take excessive risks.
Mr. McDonough is well-suited to push for substantial regulatory reform. "I like the bully pulpit and the ability it gives me to provide leadership in the community," he said in a recent interview.
He is extremely calm and methodical. For instance, when the stock market plunged 131 points in 35 minutes recently, he didn't flinch even though sudden market drops can strain even the best risk management systems at the 450 banks he regulates.
"It is very important to be calm under pressure," Mr. McDonough noted. "I learned that in the Navy. If you are the officer on the deck of a ship in a storm, you must pay attention to the storm and not to your own emotions. You have to keep your calm and look as if you are keeping your calm."
These steady nerves come in handy. In recent testimony before the House Banking Committee, Mr. McDonough came under repeated attack from Democratic lawmakers upset at the Fed's decision to raise short-term interest rates last spring.
Despite the barrage, he never raised his voice. Instead, he simply repeated his point. Long-term, people are better off if monetary policy ensures gradual growth, he testified, adding that unbridled expansion is inevitably followed by downturns as the economy overheats.
And when the Daiwa Bank scandal erupted in 1995, Mr. McDonough worked quietly behind the scenes to limit the damage to the New York Fed's reputation. Rather than confront those who blasted it for failing to detect trading losses by a rogue broker, he pushed for a harsh punishment and began warning foreign bankers during one-on-one meetings to install tougher internal controls.
The result: Congress dropped plans to impose additional restrictions on foreign banks, and the Fed retained its role as the primary regulator of foreign bank branches.
Mr. McDonough never expected to become a banking industry leader. He began his collegiate life at Holy Cross College in Worcester, Mass., more interested in belting out Dixieland jazz hits like "Darktown Strutters Ball" and "When the Saints Go Marching In" on his tuba than in setting interest rates. He even took up acting, playing the central role of John Claggart in a dramatization of Herman Melville's "Billy Budd," a morality tale involving the fear of mutiny at sea.
But he was gradually drawn to economics, earning his undergraduate degree in the subject. After graduation he joined the Navy, spending a few years in Annapolis, Md., where he taught government and economics at the Naval Academy and played Dr. John Buchanan Jr. in Tennessee Williams' "Summer and Smoke."
He has since given up both the tuba - "it is not a great solo instrument" - and acting - "central bankers should remain central bankers and leave their acting careers in the past."
He left the Navy in 1961 after earning a master's degree in economics from Georgetown University and joined the State Department as a Foreign Service officer. Fluent in Spanish and French, Mr. McDonough traveled around the world but spent much of his service in Uruguay. There, he befriended Julio Sanguinetti Cairolo, then a legislator but now the country's president.
After leaving the State Department, Mr. McDonough joined First National Bank of Chicago in 1967 and steadily climbed the corporate ladder, becoming vice chairman in 1986. He retired in 1989 and spent two years as chairman of the Illinois Commission on Public Service, which tries to attract college graduates to public-sector jobs.
He joined the New York Fed in 1992 as executive vice president, overseeing domestic open market and foreign exchange operations. He took over as president from E. Gerald Corrigan in 1993 and plans to serve until he reaches the mandatory retirement age of 70 in 2003.
Mr. McDonough, who grew up playing the piano, is an avid supporter of the New York Philharmonic, which he describes as a "crown jewel of New York." He serves on its six-member executive committee, which works with the music director to select programs and schedule soloists and conductors.
While Mr. McDonough currently is campaigning for regulatory reform, the bulk of his job remains monetary policy. As New York Fed president, he holds a permanent seat on the Federal Open Market Committee and controls the central bank's open market operations and its discount window.
He is an inflation hawk, telling a House subcommittee in July that the Fed's goal must be moderate, sustainable growth. "You want to avoid getting into boom-and-bust cycles," he said. "Sustainable economic growth brings lower unemployment."
He favors preemptive interest rate hikes and cuts, saying monetary policy's effect has at least a six-month lag so that policymakers must act without having all the evidence.
