Cathy E. Minehan, president of the Federal Reserve Bank of Boston, is quickly becoming a powerful ally of the banking industry.
In the two years since she took her post, she has staked out positions similar to those of many bankers on a wide range of issues - electronic money, the payments system, the economy, supervision, and the applications process.
"A central banker has to work with the banking system," Ms. Minehan said. "That is part of the job. I certainly have a great deal of interest and always had a lot of involvement with how things work in the financial sector, and I have a great deal of respect for the things banks do."
Her influence may be greatest over electronic money. She is chairwoman of the Fed committee responsible for guiding the payments system into the next century.
Speaking from her office high above Boston's financial district, Ms. Minehan said only depository institutions should issue electronic money that can be used at more than one store.
"It is all well and good to talk about virtual this and virtual that," Ms. Minehan said. "The reality is that the payments system is a credit extension, and credit has to involve banks."
Ms. Minehan, a 28-year Fed veteran, said she doesn't object to merchants' issuing stored-value cards that can only be used for purchases at their stores. But she said software companies and convenience stores lack the requisite risk controls and management systems to run broader payments programs.
"Microsoft isn't into the credit business," she said. "There is a role for them to provide services. But ultimately the credit must come through the banking system."
Those words are music to the banking industry's ears. "That is right on the mark," said James Chessen, chief economist at the American Bankers Association. "She is saying, 'Build on the existing system because the world of electronic payments is not very different than the world of today.'"
Ms. Minehan, 49, has spent her entire career at the Fed, rising from the ranks of examiners at the Federal Reserve Bank of New York. Still, she's not afraid to speak her mind, a trait not often associated with central bank employees.
Besides leading the payments system committee, Ms. Minehan is in charge of guiding the Fed's response to interstate banking. Her group must decide how the Fed will determine which district reserve bank is responsible for providing services such as check processing or automated clearing house operations for a bank with branches in numerous states.
"I'm trying to pull together the operational, regulatory, and supervisory people in the Fed system to make our response to interstate banking as beneficial as possible," she said. "The idea is to reduce the barriers to service."
On the monetary policy side, Ms. Minehan said, a thriving financial services sector is the best way to keep the economy pumping. "A healthy, functioning banking system is absolutely vital to a healthy economy," she said. "Economic growth, monetary policy, and the health of the banking industry are all intertwined."
The Boston Fed, which supervises five state-chartered banks and 104 holding companies, tries to keep its wards healthy by concentrating its exams on management and internal controls, she said.
"We do a hard-hitting risk management review," she said. "We focus on ensuring not just that risk management is good for now but also for going forward."
Banks, Ms. Minehan cautioned, may spend so much time focusing on the latest technological innovations and the newest financial instruments that they forget about loan quality and other business basics.
"You have to wonder that things are so global and there is so much technology that banks will forget the simple stuff like concentration of assets and separation of the front and back offices," she said.
Lack of attention to the business basics has sparked crises before, Ms. Minehan noted.
In the late 1970s and early 1980s, for example, banks poured billions of dollars into developing countries only to see their loans turn sour when oil prices wreaked havoc on those nations' economies. The industry responded by diving into domestic real estate development loans. That party eventually broke up, too, taking down nearly one-third of New England's banks.
"There are no early indications of where the next crisis will be," she said. "But I wouldn't be a central banker if I didn't worry about the downside."
These comments come from a reserve bank president whose members beat the national averages for return on assets and return on equity. In fact, after a long recession, it appears the sun is finally shining again in New England.
Still, Ms. Minehan knows examiners can't do everything. Derivative transactions can cause a bank's bottom line to fluctuate radically. The answer, she said, is to require banks to disclose their derivatives holdings, a proposal the Fed, Securities and Exchange Commission, and Financial Accounting Standards Board are considering.
She's not ready to concede that major trading banks are too complex for her examiners, noting that she opposes a proposal by Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, to let these banks relinquish their claim to deposit insurance in exchange for fewer safety- and-soundness rules.
"These are ideas that need to be thought through with care," she said. "But if they have access to the payments system, then I'm" not sure that you can control the risk "without safety-and-soundness rules."
Still, she's also aware that examiners can be too intrusive. "There is always a fine line to be walked in supervision," she said. "You want very good, in-depth examinations that give management some confidence about where they stand at a particular time."
Ms. Minehan is a major proponent of the Fed's plan to reduce the time taken for processing applications and to replace formal requests with notifications. "The applications process should not be used to resolve every single last issue of compliance," she said. "We want to enable healthy, well-managed banking organizations to expand and grow."
Her direct style and her reservoir of knowledge about electronic banking have won rave reviews from industry officials in her region.
"She was an ideal pick for this job," said Marshall Carter, chairman and chief executive officer of State Street Boston Corp., a $29 billion-asset banking company. "She brings a detailed understanding of funds transfers and securities processing. That is an unusual trait for a reserve bank president."
"She brings a level of expertise that many others just don't have," agreed Jane C. Walsh, president of Northmark Bank, North Andover, Mass. "She can look at what the Fed system needs to do to get to the future."
That doesn't mean Ms. Minehan and the industry see eye-to-eye on every issue. She stands behind the Boston Fed's controversial fair-lending study, which was widely criticized by bank economists for using what they deemed faulty statistical techniques.
Bankers have simply misunderstood the study's findings, she said. "People rarely focus on the fact that the study said a majority of the differences can be explained by other factors like income," she noted.
Ms. Minehan places much of the blame for bias problems on bankers who don't know all the rules. For example, the law requires lenders to count alimony as income, yet not all bankers do.
Despite her position of power, Ms. Minehan does some of her own grunt work. For example, she pored over a two-inch-thick document from the Basel committee on banking supervision in order to prepare a summary, rather than making a subordinate do it.
And on a recent business trip to Maine, Ms. Minehan tasted a lobster stew and wanted a batch shipped home. Rather than leaving it to an aide, she called the chamber of commerce and tracked down the local merchant herself.