Conference Report on Fed is a Step Forward on Openness, a Step Backward on Governance

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. "