Federal Reserve Bank Governance: Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency
GAO-12-18
Published: Oct 19, 2011. Publicly Released: Oct 19, 2011.
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Highlights
Events surrounding the 2007 financial crisis raised questions about the governance of the 12 Federal Reserve Banks (Reserve Banks), particularly the boards of directors' roles in activities related to supervision and regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to review the governance of the Reserve Banks. This report (1) analyzes the level of diversity on the boards of directors and assesses the extent to which the process of identifying possible directors and appointing them results in diversity on the boards, (2) evaluates the effectiveness of policies and practices for identifying and managing conflicts of interest for Reserve Bank directors, and (3) compares Reserve Bank governance practices with the practices of selected organizations.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Reserve System | While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to help enhance economic and demographic diversity and broaden perspectives among Reserve Bank directors who are elected to represent the public, the Chairman of the Federal Reserve Board should encourage all Reserve Banks to consider ways to broaden their pools of potential candidates for directors, such as including officers who are below the senior executive level at their organizations. |
In December 2011, Vice Chair Yellen sent a memorandum to all Reserve Bank presidents encouraging consideration of potential candidates who hold positions below the senior executive level in their organizations. This memorandum was sent in addition to the Vice Chair's annual letter to Reserve Bank leadership emphasizing the Board's focus on increasing director diversity. The Vice Chair's annual letter also continues to include guidance on the various types of organizations from which labor and consumer/community representatives might be recruited.
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| Federal Reserve System | While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to further promote transparency, the Chairman of the Federal Reserve Board should direct all Reserve Banks to clearly document the roles and responsibilities of the directors, including restrictions on their involvement in supervision and regulation activities, in their bylaws. |
In December 2011, the Federal Reserve Board revised its Guide to Conduct for Directors of Federal Reserve Banks and Branches ("Guide to Conduct") by adding a provision directing the Reserve Banks to document the roles of directors in their bylaws, including restrictions on director involvement in banking and supervision. Federal Reserve Board officials stated that all Reserve Banks have amended their bylaws to conform to the new guidance.
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| Federal Reserve System | While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, as part of the Federal Reserve System's continued focus on strengthening governance practices, the Chairman of the Federal Reserve Board should develop, document, and require all Reserve Banks to adopt a process for requesting waivers from the Federal Reserve Board director eligibility policy and ethics policy for directors. Further, consider requiring Reserve Banks to publicly disclose waivers that are granted to the extent disclosure would not violate a director's personal privacy. |
The Federal Reserve Board added a waiver provision to the Guide to Conduct stating that Reserve Banks are strongly discouraged from requesting such waivers except under the most exigent and extraordinary circumstances. Further, a Reserve Bank may submit a written request to the Board describing the need for the waiver upon a vote of the board of directors on whether to recommend a waiver from the Board and the Board must approve the Reserve Bank's waiver request in order for it to become effective. A similar waiver provision is already included in the Director Eligibility Policy. In a December 16, 2011 letter to the Committee on Homeland Security and Governmental Affairs, Chairman Bernanke explained that the Federal Reserve would consider making any waivers public, with due regard for protecting personal privacy. Since the GAO report was issued in 2011, Federal Reserve Board officials stated that the Board has not received any requests for waivers to the Eligibility Policy, and the Board has never received a request for a waiver to the Guide to Conduct.
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| Federal Reserve System | While the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities. As such, to enhance the transparency of Reserve Bank board governance, the Chairman of the Federal Reserve Board should direct the Reserve Banks to make key governance documents, such as such as board of director bylaws, committee charters and membership, and Federal Reserve Board director eligibility policy and ethics policy, available on their websites or otherwise easily accessible to the public. |
As of January 2013, all Reserve Banks had posted their bylaws on their websites and nearly all Reserve Banks had posted their committee charters and membership. In a couple of instances, a Reserve Bank has decided not to post a committee charter and/or membership because the Reserve Bank considers the information (e.g., Audit Committee) to be sensitive. The Federal Reserve Board has posted all director policies, a list of all current directors, and the recently updated publication "Roles and Responsibilities of Federal Reserve Directors."
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Topics
Bank managementBank reservesBanking lawConflict of interestsDocumentationFederal regulationsFederal reserve banksFinancial institutionsGovernment job appointmentsLending institutionsMonitoringWaiversPolicies and proceduresTransparency