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The fallout of JPMorgan Chase & Co.'s $2 billion trading loss has reignited old worries of just how close Wall Street is to one of its top regulators, the Federal Reserve Bank of New York. Politicians and consumer activists have called for Jamie Dimon, JPMorgan's chairman and chief executive, to resign from his position as a board director at the New York Fed.
May 18 -
The JPMorgan Chase CEO's role as industry punching bag du jour has more to do with bad politics than with bad business.
May 15 -
The $2 billion loss not only helped proponents of a tougher Volcker Rule and punctured the myth of CEO Jamie Dimon's infallibility. It also strengthened calls from regulators like Tom Hoenig for stronger action against big banks.
May 11
WASHINGTON — Esther George, president of the Federal Reserve Bank of Kansas City, defended the current structure of the central bank system, arguing that bankers should keep their seats on the boards of the 12 regional Fed banks.
Her comments came two days after lawmakers introduced a bill to strip bankers of those roles. Critics argue they create at least the perception of a conflict of interest but George said bankers were a vital part of Fed board composition.
"Yes, bankers should serve,"
The fallout of JPMorgan Chase & Co.'s $2 billion trading loss has reignited old worries of just how close Wall Street is to one of its top regulators, the Federal Reserve Bank of New York. Politicians and consumer activists have called for Jamie Dimon, JPMorgan's chairman and chief executive to resign from his position as a board director of the New York Fed.
George did not reference Dimon by name, but suggested that bankers that somehow compromised the integrity of the Fed board should voluntarily resign. It was not clear if her comments were directed at the JPMorgan chief, but she was clearly concerned that directors should avoid any perception of a conflict of interest.
Citing language by the Federal Reserve Board on directors' code of conduct, directors "should avoid any action that might result in or create the appearance of — affecting adversely the confidence of the public in the integrity of the Federal Reserve System," George said. "There are high standards that apply to Reserve Bank directors, and when an individual no longer meets these standards, the director resigns voluntarily to allow someone who does meet the criteria to serve."
The New York Fed declined to comment on the issue. A spokeswoman for JPMorgan was not immediately available to comment.
For Fed officials, who have always tried to strike a balance between keeping the institutions the central bank regulates at arm's length, while also gaining the necessary information it needs to make important policy decisions, this is not a new issue.
"Periodically, the Federal Reserve's structure is debated by Congress, the public or the media," said George. "Recently, the question of whether it is appropriate for bankers to serve on the board of the Federal Reserve's regional Reserve Banks has once again been raised."
The issue has stirred up again after Elizabeth Warren, the Harvard professor who helped set up the Consumer Financial Protection Bureau and is now running for Senate in Massachusetts, called for Dimon's ouster from the New York Fed.
Each of the regional District banks have a nine-member board of directors as mandated by Congress to gain input from across the entire country to reflect both public and private interest. Three of the board members are bankers, while the remaining six are not allowed to be bank employees or affiliated with a financial institution. The structure of the boards was changed under the Federal Reserve Reform Act of 1977 to provide a diversity of views.
"The three bankers provide critical, in-depth information about economic conditions in their communities," said George. "The banker directors at the Kansas City Fed are closely attuned to the strengths and challenges of their local communities."
George also sought to clarify a commonly held misconception by the public that such bankers — or any director on the Board for that matter — are also involved in supervision of their own and other financial institutions.
"While all directors are involved in matters regarding Reserve Bank governance and oversight, they play no part in the Fed's role in supervising and regulating financial institutions," said George. "Decisions and information about the supervisory actions are discussed directly between the staffs of the Board of Governors and the Reserve Banks. Directors do not receive this information and do not have any influence over these decisions."
