Structure and Governance


By Mary H. Karr, Senior Vice President, General Counsel and Corporate Secretary

Mary H. Karr

An earlier section of this commemorative book discussed the political compromises and considerations that led to the creation of the Fed and the placement of one of the 12 Reserve banks in St. Louis. The same consideration—balancing the interests of Main Street, Wall Street and Washington, D.C.—remains as relevant today as it was in the early 20th century, when the Fed was created. That these distinctions remain important to national well-being was evidenced during the financial events of the early part of the current century. Views about the ultimate causes of the financial crisis vary widely, but all acknowledge that its impact was felt differently on Main Street, on Wall Street and in Washington.

Even in "normal times," it is beneficial to the nation to have a decentralized central bank that reflects the needs and interests of the entire country. The Washington part of the Fed—the Board of Governors, an independent agency—oversees the regional Reserve banks, sets supervisory policy for the financial institutions it regulates and leads the Federal Open Market Committee (FOMC), the monetary policy arm of the central bank. The Federal Reserve Bank of New York reflects the views of Wall Street and the largest banks, and the other 11 Reserve banks, located throughout the country, reflect the views of their districts—or, as we think of it, the Main Streets throughout the nation.

The regional Feds, including the St. Louis Fed, reach out to their districts in many ways. The most formal and enduring way is through their boards of directors.

Directors play a key role in representing Main Street. At each board meeting, they report on their local economies by collecting information about their own businesses and industries and reviewing assessments they receive from local contacts. This information can vary from the state of the coal-mining industry throughout the world to the state of business for a local scrap-metal dealer or jeweler. All of this real-time information about the economy is used by the bank's president and the research staff to develop a more complete view of the state of the economy. This, in turn, informs the president's actions and views on the appropriate stance of monetary policy in the FOMC.

Directors Represent More than Bankers

Each of the Federal Reserve banks has a nine-member board, as required under the Federal Reserve Act. The act sets out details for the selection or election of directors to ensure representation of the public in each district.

Six of the nine directors must not be part of the banking sector. Three directors, called Class C directors, are chosen by the Board of Governors to represent the public in the district. These three directors may not be affiliated with (for example, serve as a director or employee) or own stock of a financial institution. The chair and deputy chair of each bank's board are chosen from this group of directors by the Board of Governors.

Six directors are elected by the national and state member banks in the district. Of the six, three (Class A directors) represent the district's banks and three (Class B directors) represent the public in the district. These latter three directors may not be employees or directors of financial institutions. To further ensure wide representation (and complicate this discussion) within the six elected directors, each district's commercial banks are divided into three groups by size, and the banks in each group elect one "banker" director and one "public" director.

The St. Louis Fed has three branches: Little Rock, Ark., Louisville, Ky., and Memphis, Tenn. Each has a seven-member board. Three members of each board are chosen by the Board of Governors and must generally meet the same qualifications as the Class B directors—that is, they represent the public and may not be affiliated with a financial institution. Four members of each branch board are chosen by the St. Louis Fed's board of directors and are business and community leaders or bankers.

Each bank's board is responsible for the general oversight of the bank and its management. Like directors of any corporation, the directors review the bank's strategies, budget, audits and financial performance. Directors also concern themselves with succession planning for key positions in the bank and with the performance of senior management.

In addition, six of the nine directors (the representatives of banks are excluded) play a key role whenever there is a need to appoint the bank's top two officers—the president, who also carries the title of chief executive officer, and the first vice president, who is also the chief operating officer. These six directors appoint these officers, subject to approval from the Board of Governors.

Each bank's board of directors also reviews and recommends a rate that its bank should charge creditworthy commercial banks within its own district that are eligible to borrow short-term funds from the bank. The actual rate to be charged is determined by the Board of Governors, but through their recommendations about this rate, the directors can express their views on monetary policy and credit conditions.

There is a key function of the banks in which the role of the board members is specifically limited. As previously noted, the Washington part of the central bank regulates all bank holding companies and savings and loan holding companies, certain financial market utilities, designated systemically important nonbank financial companies and all state banks that are members of the Federal Reserve System. The Board of Governors is also responsible for supervising these companies and banks—a role that it has delegated in part to the Reserve banks. Because this duty "belongs" to the Board of Governors, it functionally reports to Washington. As a result, the boards of directors of Reserve banks do not have a role in the supervision of district financial institutions.

Reserve bank directors and employees are subject to a number of policies that relate to ethical conduct. Central banks are more credible and better able to accomplish their primary missions if they are accountable to, but independent of, the political branch of government. To ensure that Reserve banks are independent of politics, both directors and officers of the Reserve banks are restricted from many political activities. They may vote, donate money and express a personal opinion, but they may not run for political office, serve in the campaign of anyone who is, or be active in a political party.

Reserve bank directors and employees also recognize the importance of integrity and public trust. All are bound by rules of conduct designed to prevent conflicts of interest. For example, a banker-director's supervisory matters or applications to engage in a new business that would normally be delegated to the Reserve bank for decision are instead referred to staff at the Board of Governors. Employees are subject to a detailed code of conduct and are trained to follow it carefully.