- Key insight: Nine out of 12 reserve banks allowed bank-appointed directors to participate in the search process for community representatives. The system also lacked a policy for disclosing conflicts of interest by presidential search firms.
- Expert quote: "The board's lack of written guidance has led to reserve banks developing varied selection processes and [the Federal Reserve Board's Office of the Secretary] not being fully aware of those processes." — the Federal Reserve's Office of the Inspector General's report.
- Forward look: The Federal Reserve Board agreed with most of the report's findings and agreed to make changes by the middle of next year.
The Federal Reserve system will reform its processes for identifying and hiring key officials at its 12 reserve banks.
An investigation by the central bank's inspector general identified several issues in the way reserve banks hire presidents and directors. These include a lack of screening for prohibited investments, the role bankers sometimes play in recruiting members for regional Fed bank boards of directors and conflicts of interest during presidential searches.
The report, released on Wednesday, examined practices throughout the Fed system between 2021 and 2024. It included five key findings and called for 10 policy changes, most aimed at creating more standardized hiring processes across the system.
"The board's lack of written guidance has led to reserve banks developing varied selection processes and [the Federal Reserve Board's Office of the Secretary] not being fully aware of those processes," the report states.
The discrepancies between different reserve banks is a product of the system's federated design, consisting of a dozen quasi-private reserve banks — which are owned by member banks in their respective districts — that are overseen by a board of presidentially appointed and Senate-confirmed governors in Washington.
Each reserve bank has nine directors divided into three categories: Class A, appointed by their member commercial banks to represent their interests; Class B, appointed by member banks to represent community interests; and Class C, appointed by the board of governors to represent community interests. The different tiers are meant to ensure that reserve banks are accountable to both their members as well as the broader public.
Yet, because Class C director candidates are identified by reserve bank staff members and recommended to the board in Washington, there is room for different approaches, some of which created openings for conflicts of interest, the report stated.
"[T]he lack of written guidance from the board has resulted in nine of the 12 reserve banks allowing Class A directors to be involved in recruiting or approving the Reserve Bank president's nomination of Class C directors to the Board of Governors for appointment," the report reads. "[T]he involvement of Class A directors in the selection of Class C directors may give member banks undue influence over the composition of the entire board of directors, rather than reinforcing the Federal Reserve Act's mandate that the board of governors appoint Class C directors."
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The report did not call for Class A directors to be barred from Class C search processes, but notes that that the practice should be evaluated by officials in Washington. It also notes that the Fed governor who chairs the board's Bank Affairs Committee — a position currently held by Gov. Christopher Waller — should have a more defined role in the Class C search processes throughout the system.
The report also notes that Class C directors are not always screened for eligibility or prohibited financial interests and calls for a disclosure policy that addresses such conflicts before individuals are appointed.
Other issues raised in the report include a lack of requirement from the board in Washington for external executive search firms hired by reserve banks to disclose potential conflicts of interest with prospective candidates.
Such an issue was raised in 2023 after Austen Goolsbee was
The report notes that the reserve bank was not aware of the conflict until four months after Goolsbee applied. When the Chicago Fed found out, it did not alert the board of governors in Washington.
"Board Ethics reviewed the situation with the reserve bank's general counsel and decided against further follow-up because the spouse had not been involved in the search," the report states. "The search committee ultimately submitted the candidate as the preferred selection to the board of governors, whose approval of the candidate resulted in negative media attention for the System."
The report calls for a new policy on conflict disclosure requirements from search firms and a requirement for reserve banks to disclose conflicts to the board. It also recommends setting clearer standards for other executive appointments, including chief financial officers, general auditors and senior supervisory officers.
The Federal Reserve Board in Washington concurred with the majority of the findings and agreed to implement most of the recommendations. It contested assertions from the inspector general that Class C directors could access confidential information about monetary policy, but agreed that a more robust screening process would be appropriate.
The board committed to implementing the recommended changes by the second quarter of 2027.
