Fed IG calls for changes in process governing regional Fed leadership selection

Sept 2 (Reuters) – The Federal ​Reserve’s in-house watchdog is calling on the central bank to overhaul parts of the process ‌that governs how leaders of the 12 regional central banks and other top staff are selected.

The report, opens new tab from the Fed’s Inspector General, released on Wednesday, zeroed in on the role played by so-called Class C directors sitting on the respective boards overseeing ​the regional Fed banks. It said these directors, who are placed on regional boards by the ​Fed in Washington, need greater oversight when it comes to their personal financial dealings.

For ⁠these Class C directors, the Fed’s Board of Governors “does not prescreen candidates for possible conflicts or inform them ​of specific prohibited stockholdings before appointment.”

Also, the board “does not have Class C directors personally review and account for ​their financial interests and transactions to ensure there are no potential conflicts, policy violations, or eligibility issues; attest that they understand that stockholdings of spouses and minor children may affect their eligibility; or certify they understand they are subject to federal conflict ​of interest laws,” the IG report said.

The Fed also needs more formal rigor in the process of selecting ​bank presidents, the IG said.

The Fed in Washington “has not documented its expected candidate selection process to Reserve Banks in detail, ‌including identifying ⁠the Reserve Bank personnel to be involved and their roles and responsibilities.” Not doing this has resulted in the Fed “not being fully aware of certain practices that vary among Reserve Banks.”

The Fed’s 12 regional banks operate under the oversight of the Board of Governors in Washington but are quasi-private institutions technically owned by member ​banks. Each of the regional ​Fed banks is overseen ⁠by local boards drawn from their respective communities. Regional Fed bank presidents are active participants in setting the nation’s monetary policy, and also play a key role ​in financial regulation.

The most prominent responsibility of those boards is to help select new ​bank leadership ⁠and to oversee that leadership. Board members drawn from banks are prohibited from participating in picking a new bank president.

Like Fed officials, regional Fed directors face a range of limits on their financial holdings and are not allowed ⁠to hold ​stock in banks, for example.

The IG said in response to a ​list of factors that should be changed that “the Board concurred with our recommendations and outlined planned actions to address the recommendations. We ​will follow up to ensure that the recommendations are fully addressed.”
Reporting by Michael S. Derby; Editing by Andrea Ricci