Who Directs the Fed?

Abstract

During the financial crisis, questions arose concerning links between the Federal Reserve and the business community. This paper provides the first in-depth study of one mechanism creating such links: Reserve Bank directorships. By law, each Reserve Bank is governed by a nine member board consisting of three banking representatives and six representatives of the public. Member banks elect six directors, the remaining directors are appointed by the Board of Governors. The representation of private interests on Reserve Bank boards may clearly benefit the public. However, it may also benefit individual director employers, which may not be consistent with the goals of Federal Reserve governance. To shed some light on this issue, I examine who sits on Federal Reserve Bank boards and the market reaction to the appointments of executives of publicly-traded companies over the period 1990-2009. I document that banking representatives are more likely to be chosen from large banks. Furthermore, the average stock price reaction to the appointment of a firm’s officer to a Reserve Bank board is positive only for banks. I discuss potential explanations for these findings.

Keywords: Federal Reserve, Director, Banks, Regulatory Capture, Governance

JEL Classification: E58, G28, G30