WASHINGTON — As the Trump administration enters its sixth month in office, it has yet to name a nominee to the Federal Reserve Board who has experience with community banks — a legal requirement that experts say may be complicating the president’s ability to fill vacant seats on the central bank.
“Vacancies at the Fed are a huge problem, and it’s been a problem that has been extending in [recent] decades,” said Peter Conti-Brown, assistant professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business. “If the reports are true that it is not for a want of trying that the Trump administration is not filling this vacancy, then you get a much better sense of what the source of the barrier is.”
Aaron Klein, senior fellow at the Brookings Institution and policy director of the Center on Regulation and Markets, said that the provision — along with the creation of the position of vice chair of supervision as part of the Dodd-Frank Act — has begun a trend of adding additional responsibilities and mandates to a Federal Reserve System whose original mandate was much narrower.
“Congress, as it has continued to give the Fed more authority and broaden the mandate, it is trying to slowly move the governors to have more individual, carved out roles, responsibilities and backgrounds — which inevitably creates a bit of tension with the chair,” Klein said. “The original 100 year old system imagined more decentralized control in the board and the regional banks … but with a much narrower mandate. Today, the mandate of the Fed has grown, while control of the organization has become more centralized.”
The Federal Reserve Board consists of seven governors, each of whom are nominated by the president and given staggered 14-year terms. One governor may serve a four-year term as chair of the board, and may be renominated as chair by the president for as long as their underlying 14-year terms are unexpired. Another governor may be nominated as vice chair for supervision and has certain duties and responsibilities overseeing bank regulation and supervision. But none of the other governors have any specific enumerated responsibilities — save the vice chair, who serves “in the absence of the chairman.”
But the Federal Reserve Act has a handful of specifications about who may be nominated to serve on the board. No two members of the board may serve “from any one Federal Reserve district” — though that provision is so vague that it poses little impediment to a nomination. And the President is required to “have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country” — though that provision is also so vague as to be effectively meaningless.
The community bank provision, mandating that “at least one member with demonstrated primary experience working in or supervising community banks having less than $10,000,000,000 in total assets,” is the most specific membership requirement of any of the governors. It was added to the Federal Reserve Act as part of the 2014 reauthorization of the Terrorism Risk Insurance Act by then-Sen. David Vitter, R-La. Vitter said upon its passage that the provision was “a win for our community bankers” who have “been getting the short end of the stick in the financial sector.”
Camden Fine, president of the Independent Community Bankers of America, said that part of the problem with filling the position is that active community bankers would have to effectively divest themselves and their families of their holdings in the bank in order to take the job. That can be complicated, if not impossible, for small banks that are often family-owned businesses, he said.
“Community bankers own their banks, and so you’re divesting of the family net worth,” Fine said. “So unless you were going to sell your bank anyway and just retire to an island in the Caribbean somewhere, you’re not willing to do that. So that’s a significant hurdle and makes the process more complicated.”
Allan Landon, assistant dean of corporate outreach at the University of Utah’s David Eccles School of business, knows the process well — he was the first, and so far only, person to be nominated for that seat. Landon, a former Bank of Hawaii CEO, was nominated by President Obama to the Fed board in January 2015, and said the divestment requirements were “quite stringent."
“Anything with a financial business component was to be sold or liquidated,” Landon said in an email. “Many community banks are owned by individuals, families or other small groups. Divestiture in these cases can be very difficult, ending a life’s work of building a business and/or taking a lengthy period to complete.”
Landon said his hopes as a Fed governor was to provide the rest of the board with the kind of firsthand experience that only community bankers can impart — how policies might be felt by small institutions and the customers they serve.
“My theme was that community institutions are important to our economic system and especially important to some areas of the economy that were most adversely affected by the recession,” Landon said. “Making sure that policy, supervision and regulation did not place an undue burden on community institutions or limit their ability to serve their markets would have been a focus for me.”
But Conti-Brown said the fact that active community bankers face a higher hurdle than other qualified nominees — namely, the supervisors of community banks — might actually mean the Fed is less likely to attain that experience than it might otherwise have been.
“Now by writing this into law and making it broader, has Congress actually had the unintended consequence of limiting the ability to community bankers to participate on the board of governors?” Conti-Brown said. “We’ve had a long history of people with community banking experience at the Fed Board of Governors, and once you write it into law, it becomes more formal, more structured, and more difficult.”
Klein said there is a significant risk of the community bank provision being viewed over time much the way the geographical requirements are — a rote exercise in box-checking that has little meaningful limitation on who the president can selects for the job. But the Fed is also governed by tradition as well as statute, and no one knows what role the community banker seat might ultimately play because no one has yet taken the job.
“There’s a requirement that each of the governors come from different Fed districts, which has become a meaningless exercise in looking up old mailing addresses,” Klein said. “Putting in statute a requirement that somebody from a specific type of bank be a Fed governor was kind of unprecedented when it came in, and somewhat ill-defined.”
Kevin Petrasic, a partner at White & Case, said the provision is at risk of not living up to its purpose if the board seat is not filled by someone who can credibly say he or she has the experience of community banking. That doesn’t necessarily mean it has to be a current, active community banker, but it has to be someone who can represent the industry.
“There’s a reason for the provision, and to maintain the integrity of that you have to get someone who … can legitimately say they understand at the on-the-ground level, what the issues are for community banks,” Petrasic said. “If you’re going to have the position, it’s important to have someone whose perspective is informed by those experiences.”
But Conti-Brown said the views of the community banking industry are already known to the Fed. Community banks enjoy some of the broadest bases of political power of any industry, and the principle of reducing regulatory burden for small banks is broadly bipartisan, he said.
“Even without [the seat], when the Fed and when Congress have increased the regulatory and supervisory burden on community banks, there’s been bipartisan efforts to walk that back,” Conti-Brown said. “This is one of the few areas of bipartisan agreement about reforming Dodd-Frank — making the burden designed for very large banks a bit lighter for small community banks.”
Petrasic said the community banking interests are different from others because small institutions often serve as the only legitimate financial intermediaries in many areas across the country, and also face a decades-long trend of consolidation.
“The community banking seat is a little bit different in the sense that a very important policy objective has been, and continues to be, the preservation of community banking,” Petrasic said. “I think there’s a recognition that having a specially designated seat … is important because it helps balance out the focus on much larger institutions and also maintains some degree of competitiveness for community banks.”
Fine said that despite the delays and challenges facing the administration in nominating someone to fill the community banker slot, he believes a qualified nominee will be forthcoming.
“Remember, 98.2% of FDIC-insured institutions in the country are community banks,” Fine said. “That perspective should be represented on the board.”