By Mark Felsenthal
(Reuters) - Regional Federal Reserve banks need a clearer process to avoid conflicts of interest given their heavy reliance on directors who work for financial institutions that the central bank regulates, a congressional watchdog agency said on Wednesday.
"While these relationships may not give rise to actual conflicts of interest, they can create the appearance of a conflict," the Government Accountability Office said.
Many institutions linked to directors of regional Fed banks took advantage of the central bank's emergency lending programs during the 2007-2009 financial crisis, underscoring the potential for conflicts, the investigative agency said.
The report was mandated by the Dodd-Frank overhaul of financial rules that was put in place last July in an attempt to prevent future crises.
Although the boards of Fed banks are supposed to have directors representing a range of groups, including labor and consumers, in practice many directors have ties to the financial industry.
GAO urged the 12 regional Fed banks to clearly document directors' roles in bank supervision and regulation. Similarly, it recommended that Fed banks create a process for letting directors step aside from dealing with matters where they might face a conflict of interest.
Stephen Friedman, a former Goldman Sachs chairman, was forced to step down as chairman of the New York Federal Reserve Bank's board when it emerged he bought shares in Goldman after it had won the right to borrow at the Fed's emergency lending window in September 2008. He was still on Goldman's board at the time.
That incident was one factor that prompted lawmakers to call for the GAO study.
More broadly, critics contend that the Fed system, with extensive ties between the financial industry and officials, fostered a culture of hands-off oversight that helped lay the groundwork for the financial crisis.
The GAO study, however, said the Fed manages and diffuses actual conflicts of interest at Fed banks. It also found that directors have limited roles in supervision, regulation, and budgetary and personnel actions.
The Fed system is composed of a Fed board in Washington and the 12 regional banks.
Officials on the Washington board, including the chair and vice chair, are nominated by the president and subject to Senate confirmation.
In contrast, regional Feds are owned by member banks and their presidents, who vote on monetary policy decisions on a rotating basis, are picked by their boards. Board directors are picked by member banks and the Fed board in Washington.
(Reporting by Mark Felsenthal; Editing by Andrea Ricci and Andrew Hay)
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