Sen. Christopher Dodd's proposal to revamp financial market regulation includes provisions that would change the way the Federal Reserve chooses directors at the central bank's 12 regional banks, putting more power in Washington and giving the White House and Senate a say in who runs those banks.
The Fed could fight hard against the provisions, which rewrite the 1913 Federal Reserve Act which gave birth to the modern central bank and subsequent rewrites in the 1930s.
Fed officials have been worried for months that Congress would rewrite the law and diminish the Fed's political independence. A proposed revamp in the House does not change these governance rules. Dodd's proposals now make the Fed's independence a part of the broader debate on regulatory reform.
The Fed has an unusual structure that mixes public and private interests. The seven-member Federal Reserve Board in Washington, which plays the dominant role in setting interest rates, is appointed by the president and its members confirmed by the U.S. Senate.
But the Fed system also includes 12 regional banks, each of which has a nine-member board of directors chosen from the private sector. These banks have a say in certain interest rates and also are designated by the Fed to help regulate private banks in those districts.
Their private-sector directors, among others things, help choose the presidents of the regional Fed banks, who cast votes on monetary policy in the Federal Open Market Committee.
Each regional bank has nine directors divided into three classes. Under current law, Class A directors represent banks and are chosen by local bankers in each district. Class B directors represent the broader public and are chosen by banks in each district. Class C directors represent the public and are chosen by the Federal Reserve Board in Washington.
Sen. Dodd, a Connecticut Democrat, is proposing that Class A and Class B directors be chosen by the Fed's Board of Governors in Washington, not by private banks, and that two of the Class C directors be chosen by the Fed board. His bill would require that the chairman of every regional bank board be appointed by the President of the United States and confirmed by the Senate.
Fed officials have been reviewing their governance for several months. Critics argue that the Fed's regional banks are too close to private banks which the Fed helps to regulate.
Earlier this year, the chairman of the Federal Reserve Bank of New York, Stephen Friedman, stepped down from his position amid reports that while serving as New York Fed chairman he was buying stock in Goldman Sachs, where he was a director. Goldman had become a Fed-regulated bank just a few weeks before his purchases. Though the purchases were allowed by the Fed, their disclosure was an embarrassment to Friedman and the central bank.