Conference Report on Fed is a Step Forward on Openness, a Step Backward on Governance
For Immediate Release: June 8, 2010
Contact: Alan Barber, (202) 293-5380 x115
Washington, D.C. - Statement from Dean Baker, co-director of the Center for Economic and Policy Research on the House-Senate Conference Committee's latest requirements for Federal Reserve disclosure and governance:
"The House-Senate Conference Committee on the financial reform bill has agreed to conditions on disclosure that will be a big step forward towards increasing transparency around the Federal Reserve's operations. At the same time, the conference language is a setback from strong language in the Senate bill that would limit the conflict of interest that results from banks having substantial control over their own regulator.
"The conference committee accepted the Senate's language that would require the Fed to make available on its website the conditions of the loans, including interest rates and collateral posted, that were issued by the special facilities created during the financial crisis. This will allow members of the public and the media to scrutinize these loans to ensure that proper practices were followed. The Fed will also be obligated to disclose the conditions of loans from special facilities created in the future. Unfortunately, the wording on this future disclosure requirement could lead to a delay of many years between the issuance of the loans and any public disclosure or a GAO audit.
"The conference committee also agreed to require the Fed to disclose its discount window transactions and open market operations after a two-year lag. This reverses a previous insistence by the Fed that these transactions must be protected from disclosure.
"On governance of the Fed, the conference commitment took a step back from the Senate language, which would have reduced the control of the banking industry over the Fed. Currently the Presidents of the twelve district Federal Reserve Banks are appointed by their boards of directors, and two thirds of the directors are elected by their member commercial banks. The Senate language would have shifted the power of appointment from the banks to the President and Congress in the case of the President of the New York Federal Reserve Bank, by far the most important of the district bank presidents. It also would have prohibited member banks from voting for directors and employees of banks from serving as Fed district bank presidents.
"The conference committee instead agreed only to prohibit the Class A directors -- those representing member banks -- from voting on the district banks presidents, which does very little to reduce the power of the banks over the district Feds. The Class B directors -- those representing the public -- are still elected by the member banks in their district. Furthermore, as insiders to the industry, the Class A directors are still likely to have substantial influence over the selection process even if they do not have a formal vote.
"For these reasons, the conference committee's removal of the Senate language making the New York bank president a presidential appointee as well as the prohibitions of member banks from voting for directors and bank employees from becoming district bank presidents is a step backward in the effort to make the Fed independent of the banking industry. "