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US banks are too powerful over Federal Reserve

Sean Farrell
Sunday 22 May 2011 19:00 EDT
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The US Federal Reserve is in danger of being captured by America's biggest banks, according to new academic research.

The Fed is the most explicit among major central banks in enlisting executives working for private banks to serve on its boards. It comprises 12 regional not-for-profit banks set up to be independent of the US government. Each has nine directors, who are meant to represent the public interest, with six nominated and selected by private banks in an opaque process.

Analysis by Professor Renee Adams, a member of the Financial Markets Group at the London School of Economics, suggests big banks gain the most from having executives on Fed boards, and shows that fewer banks are involved in the process. Professor Adams found that there were few contested elections for reserve bank directorships and that, due to consolidation, the number of banks nominating and electing directors is shrinking.

Her research also found that the share price of publicly traded banks goes up when they are appointed but does not for executives of traded non-banks. There is also evidence that banks with Fed directorships are less likely to go out of business than other banks.

The issue is of increasing importance because the 2010 Dodd-Frank Act expands the Fed's powers of supervision and gives it a greater role in resolving future financial crises.

Professor Adams said: "If you look at other central banks, most have boards like the US central bank, but a lot of times the director is not working full-time for a private company.

"Potentially a way to go is to say, if you accept a position as a Fed director, you shouldn't also be working for a bank. They may also want to provide more disclosure about the whole process, because it's not clear how the nominees are chosen. The fact that there are so few nominees suggests the banking industry could be colluding about who is the next director."

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